What is 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 determine how many units of security they can purchase, which helps them to control risk and maximize returns.

What is the best position sizing strategy?

The best position sizing strategy is not the same for every trader and varies by trading style and personal risk tolerance. However, if there was one rule by which all traders had to obey, it would be to risk a maximum of a few percents of the account in every trade.

How do you determine the optimal position size?

Here are some different methods for traders to determine an optimal position size that may also reduce their risk. Traders should develop an informed, strategic methodology for determining the size of a trade, rather than randomly selecting a position or electing a pre-determined position size for all trades.

What happens if a position size is too small?

If you choose a position size that is too small, your profits will never grow at a significant rate. Conversely, if you are position sizing too aggressively, you run the risk of totally wiping out your trading account. As you might have already guessed, the latter is more common than the former.