Position Sizing

Position sizing is the conversion of a price idea into a quantity. Professionals usually size from the risk, not from a conviction score and not from how much buying power the broker offers. The account risks a small, fixed fraction on the idea. The number of shares is whatever makes the stop equal that fraction. A wide stop means fewer shares. A tight stop means more shares and a greater chance that noise hits the stop. Sizing from the chart's distance keeps one bad idea from becoming the month. Sizing from enthusiasm does the opposite.

Fix the fraction before the session, a number you can lose ten times in a row without changing your behaviour. Compute the size from the actual stop distance after the entry is chosen, and round down. Include a slippage allowance in the distance so a bad fill is still inside the budget. Cap the size by liquidity as well as by risk. A risk budget that requires 30 percent of the average daily volume is not executable at the stop you used in the formula. Cut the risk budget until both constraints are satisfied. Never increase the size because the last trade won.

Write the size in the journal next to the planned R. If you find that you take larger size on the trades that feel certain, you have a second, hidden system. Certainty is not in the sizing formula for a reason. The trades that feel certain include the ones that gap. Keep the fraction stable for a large sample before you consider raising it. Raising size after a winning streak is how the eventual loser is the large one.

Sizing by a fixed number of shares, so a wide-stop trade risks five times a tight-stop trade, and calling that consistent. Also using the full broker leverage because it is available. And sizing off the distance to a mental stop you will move. The size has to match the stop you will actually obey. If you obey a farther stop, size from that one.

The formula assumes the loss is the stop distance. Gaps, halts, and options volatility make the loss larger. A fraction that is safe for a liquid intraday future can be too large for an earnings swing in a single stock. Size is also not diversification. Five positions sized at 0.5 percent that all depend on the same index move can lose 2.5 percent together. Count the correlated bet, not the tickets.