Definition

Position Sizing is the process of determining how much capital to allocate to a single trade based on account size and risk tolerance. It is a core component of risk management.

Proper position sizing helps limit the impact of any one trade on total portfolio value.

Example in Context

A trader with a $20,000 account decides to risk 2% per trade. This means no more than $400 in potential loss exposure is allocated to a single position.

FAQs

Why is position sizing important?

It helps control risk and protect capital over time.

Does increasing position size increase potential returns?

Yes, but it also increases potential losses.

Is position sizing used in automated trading?

Yes. Many automated strategies include predefined position sizing rules.

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