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Trading Strategies
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Position Sizing Strategies and Techniques in Trading
Optimal position size calculation for risk management
BeginnerPosition Management
Position Sizing Overview
The size of the capital invested in a portfolio, strategy or trade as a percentage of your overall capital is termed as the size of that position. Position Sizing, therefore, is the methodology used to determine that size.
Once you have a strategy with a positive expectancy, the right position sizing is the difference between actually making money or going bust.
As Larry Hite, one of the forebearers of system trading puts it: 'I have two basic rules about winning in trading as well as in life: If you don't bet, you can't win. If you lose all your chips, you can't bet'
Key Points
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Position sizing is crucial for capital preservation and long-term trading success✓
Account risk should typically not exceed 2% per trade for retail traders✓
Trading biases like recency bias and gambler's fallacy can destroy trading accounts✓
Kelly Criterion provides a scientific approach to optimal position sizing✓
Fixed percentage methods are simple but may not account for changing market conditions✓
Advanced techniques like CPPI combine risky and risk-free assets for downside protection✓
Position sizing cannot make an unprofitable strategy profitable✓
Systematic approaches remove emotional decision-making from position sizing