Position sizing connects a trading idea to a measurable amount of risk. The same setup can produce very different outcomes when the position size changes, even if the entry and stop remain identical.
Start with the stop
First determine where the trade idea becomes invalid. The distance between entry and stop then becomes an important input when calculating a suitable position size.
Keep risk consistent
A trader can use a fixed percentage, a fixed monetary amount, or another predefined framework. The important principle is consistency: the risk decision should be made before the trade rather than adjusted emotionally after it is open.
- Entry: the price at which the trade is planned.
- Stop: the level that invalidates the trading thesis.
- Risk budget: the amount the trader is prepared to lose if the thesis fails.
- Quantity: the resulting position size after considering instrument specifications.
Account for the instrument
Contract specifications, point value, tick size, leverage, and currency conversion can affect the actual monetary result. Traders should verify these details for the instrument and platform they are using.
Good position sizing makes the size of the trade a consequence of the setup, not the reason for taking it.