| Position sizing helps a trader to limit the amount of | | | | per trade. Then you can buy only $8,000 of stock |
| loses made in trading. It is the part of your investing | | | | and risk $800 (2% of your%40,000). If let us say |
| strategy that helps you decide how much to place | | | | the stock price is $8, you can buy only 1000 units. |
| into any one investment, how many shares to buy | | | | This is position sizing. |
| and how much risk your portfolio will bare in each | | | | Stock price of $8 |
| trade. It is a powerful investing concept. This article | | | | Portfolio size of $40,000 |
| will explained position sizing in simple terms, the | | | | Risk Model of 2% per trade |
| benefits and the ways in which to incorporate it. | | | | The stop loss is 10% |
| Learn from great traders. The most successful | | | | Total risk is $800 (2% of $40,000) |
| investors used position sizing by putting only a little | | | | Amount to trade at 10% stop loss is $8,000 |
| part of their money (2-3%) at risk on one idea. They | | | | Total shares is 1000 units |
| use this strategy to control risk. Position sizing | | | | (Variables such as slippage, commissions, etc are not |
| incorporates using the stop loss and the maximum | | | | considered) |
| loss. The stop loss determines the highest amount of | | | | Position sizing therefore effectively determines the |
| money to be lost while position sizing determines | | | | amount of shares a trader can buy without |
| how many units of stock you are capable of | | | | exceeding their maximum loss. With this example, |
| purchasing thereby limiting the risk on the | | | | even novice investors can properly position size their |
| entireportfolio. | | | | trades without risking too much on one position. You |
| 1. For example, if you have a $40,000 portfolio with a | | | | will be prepared regardless of what happens with any |
| 2% risk model and 10% stop loss. 2% risk model | | | | one position. You will never worry about taking big |
| means you will risk only 2% ($800) of your portfolio | | | | losses. |