What is Position Sizing?
Position sizing is the process of determining how many shares or contracts to trade based on your account size, risk tolerance, and the specific trade setup.
Position Sizing Explained
Position sizing is arguably more important than entry timing. Even a great trade idea can destroy your account if you put too much capital into it. The most common approach is the fixed-percentage method, where you risk a set percentage (typically 1-2%) of your total account on any single trade.
Real-World Example
With a $50,000 account and a 2% risk limit, you can risk $1,000 per trade. If your stop loss is $5 below your entry, you would buy 200 shares ($1,000 / $5). This keeps every trade's risk within your predetermined limit.
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