Importance of Positional Sizing

What is Positional Sizing?

Position sizing forms the corner stone of a trading system. A crucial element of trading success is taking the proper position size on each trade. Position size is how many shares you take on a stock trade, how many contracts you take on a futures trade, or how many lots you trade in the forex market. Position size is not randomly chosen, nor based on how convinced you are a trade will work out. Rather, position size is determined by a simple mathematical formula which helps control risk and maximize returns on the risk taken.

Traders frequently take a random position size. They may take more if they feel "really sure" about a trade, or they may take less if they feel a little leery. These are not valid ways to determine position size. A trader should also not take a set position size for all circumstances, regardless of how the trade sets up, and this style of trading will likely lead to underperformance over the long run.

Traders with small accounts have a tendency to take larger bets, which they need to avoid. Once there is big dent to the capital, the recovery of capital is much more difficult task than one can imagine. Your position size, or trade size, is more important than your entry and exit when day trading stocks. You can have the best strategy in the world, but if your trade size is too big or small you'll either take on too much or too little risk. The former scenario is more of a concern, as risking too much can evaporate a trading account quickly.

Trader’s account size and risk tolerance should be taken into account when determining appropriate position sizing. Your risk is broken down into two parts--trade risk and account risk.

There are multiple ways to decide positional sizing, I generally follow the approach based on fixed sizing for each trade.

Download the positional sizing calculator using the below link if you already don't have one.
Download Positional Sizing Calculator

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