What is Position Sizing?
Position sizing is the art of deciding how much capital to allocate to each trade. Many traders focus only on entry-exit points, but without the right position size, even the best strategy can fail.
Why is Position Sizing Important?
Imagine two traders, A and B, both with a capital of ₹10 lakh:
- Trader A risks ₹2 lakh per trade. A few bad trades can wipe out his account.
- Trader B risks ₹20,000 per trade, ensuring longevity in the market.
Trader B, even with a lower win rate, will survive longer and have higher chances of success.
How to Calculate Position Size?
A simple method is the 2% Rule: Never risk more than 2% of your total capital on a single trade.
- Example: If your capital is ₹10 lakh, risk per trade should be ₹20,000.
- If a trade has a 5% stop-loss, the position size should be ₹20,000 ÷ 5% = ₹4 lakh worth of stock.
By following proper position sizing, traders can limit losses, protect capital, and trade with confidence.
