The process of translating a predefined loss limit and stop distance into the number of shares, contracts, or units to trade.
How it works
Position sizing starts with the maximum acceptable loss, then divides it by the loss per unit between the planned entry and invalidation level. Exposure and liquidity limits should also be applied.
Example
With a 500 risk limit and a 5 stop distance, the arithmetic maximum is 100 shares before costs, slippage, and portfolio constraints.
Limitations
Stops may execute at worse prices or not at all. Correlated positions, leverage, gaps, and changing volatility can make nominal risk understate total portfolio risk.
Evidence LedgerHow this insight was built
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This definition explains Position Sizing accurately, with its practical use and material limitations.
Key assumptions
- The named calculation or convention is stated where definitions vary.
- The example is illustrative and not a forecast or recommendation.
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