What Is Position Sizing?

Position sizing refers to the number of units invested in a particular security by an investor or trader. An investor's account size and risk tolerance🐟 should be taken into account when determining appropriat🌳e position sizing.

Understanding Position Sizing

Position sizing refers to the size of a position within a particular portfolio, or the dollar amount that an investor is going to trade. Investors use position sizing to help determi🌼ne how many units of security they can purchase, which helps them to control risk and maximize returns.

While position sizing is an important concept in most every investment type, the term is most closely associated with day trading and currency trading (forex).

Position Sizing Example

Using correct position siz🌳ing involve🦹s weighing three different factors to determine the best course of action:

Account Risk

Before an investor can use appropriate position sizing for a specific trade, they must determine his account risk. This typically gets expressed as a percentage of the investor’s capital. As a rule of thumb, most retail investors 澳洲幸运5官方开奖结果体彩网:risk no more than 2% of their inve﷽stment capital on any one trade; fund managers usually rℱisk less than this amount.

For ex🀅ample, if an investor has a $25,000 account and decides to set their maximum account risk a🐠t 2%, they cannot risk more than $500 per trade (2% x $25,000). Even if the investor loses 10 consecutive trades in a row, they have only lost 20% of their investment capital.

Trade Risk

The investor must then determine where to place their 澳洲幸运5官方开奖结果体彩网:stop-loss order for the specific trade. If the investor is trading stocks, the🏅 trade risk is the distance, in dollars, between the intended entry price and the stop-loss price. For example, if an investor intends to purchase Apple Inc. at $160 and place a stop-loss order at $140, the trade risk is $20 per share.

Proper Position Size

The investor now knows that they can risk $500 per trade and is risking $20 per share. To work out the correct position size from this information, the investor simply needs to divide the account risk, which is $500, by the trade risk, which is $20. This means 25 shares can be bought ($500 / $20).

Position Sizing and Gap Risk

Investors should be aware that even if they use correct position sizing, they may lose more than their specified account risk limit if a stock gaps below their stop-loss order.

If increased volatility is expected, such as before company earnings a👍nnouncements, investors may want to h🌼alve their position size to reduce gap risk.