risk · 2 min

Position Sizing Basics

What You Will Learn

  • Why position sizing matters more than entry signals.
  • How to calculate a basic fixed-fraction position size.
  • The relationship between position size and probability of ruin.

The Core Idea

Most beginners ask: “What should I buy?” A botter asks: “How much should I risk?”

Position sizing determines what percentage of your capital you allocate to a single trade. Get this wrong, and even a profitable strategy will blow up your account. Get it right, and you can survive the inevitable losing streaks.

Fixed-Fraction Method

The simplest approach:

  1. Decide the maximum percentage of your account you’re willing to lose on a single trade (e.g., 1%).
  2. Calculate your stop-loss distance (entry price minus stop price).
  3. Divide your risk amount by the stop-loss distance.
Risk per trade = Account balance × Risk percentage
Position size = Risk per trade / Stop-loss distance

If your account is $10,000, your risk is 1% ($100), and your stop is 2% below entry, your position size is $5,000.

Common Failure Modes

  • Oversizing after wins. Confidence inflates position sizes. The math doesn’t care about your mood.
  • Ignoring correlation. Five positions in correlated assets is really one large bet.
  • Forgetting fees and slippage. Your real risk is always slightly larger than your calculated risk.