PositionSize

PositionSize refers to the quantity of a security or contract that a trader holds in a given trade. It determines the level of market exposure and the potential monetary impact of price movements. Proper position sizing is a central element of risk management and capital allocation in trading and investing.

Common approaches to determine position size include fixed fractional sizing, fixed dollar risk, and volatility-based sizing. Fixed fractional sizing allocates a constant percentage of the trader’s capital to each trade. Fixed dollar risk sets a constant dollar amount of risk per trade, regardless of the instrument price. Volatility-based sizing adjusts position size according to the asset’s price volatility, aiming to keep risk more constant across different instruments.

Calculating position size generally involves three inputs: the trader’s account equity, the amount of risk they are willing to take per trade, and the distance from entry to stop loss (or the dollar risk per unit). A common framework is: dollar risk = account equity × riskPerTrade (as a decimal), risk per unit = |entryPrice − stopPrice|, and positionSize = dollarRisk ÷ riskPerUnit. For forex, futures, or other contracts, the calculation must account for contract size and pip or tick value.

Example: with a $10,000 account and a 1% risk per trade ($100), buying a stock at $50 with a stop at $49.50 implies a risk per share of $0.50. The allowed position size would be 100 ÷ 0.50 = 200 shares. This uses the entire $10,000 exposure to the trade, so in practice traders also consider commissions, spreads, and margin.

Practical considerations include broker margin requirements, leverage, liquidity, and potential slippage. Position size should align with overall risk tolerance and portfolio diversification to avoid excessive drawdown and to maintain capital for remaining opportunities.