TRADING GLOSSARY

Position sizing: how much to risk on each trade

Position sizing determines how many shares, lots, or contracts you trade on each position. It is the single most important risk management decision you make, directly controlling how much you gain or lose on every trade.

The 1% rule

The most common position sizing rule is to risk no more than 1% of your total account on any single trade. With a $10,000 account, your maximum risk per trade is $100. The formula: Position Size = (Account × Risk %) / (Entry − Stop Loss). If you buy at $50 with a $48 stop loss, your risk per share is $2. Position size = $100 / $2 = 50 shares.

Why position sizing matters

Even the best trading strategy will have losing streaks. With 1% risk, a 10-trade losing streak only costs 10% of your account — painful but recoverable. With 5% risk, the same streak costs 50% — devastating. With 10% risk, it costs 100% — you are wiped out.

Advanced position sizing

Volatility-based: Use ATR to adjust position size — trade smaller in volatile markets and larger in calm markets. Kelly Criterion: A mathematical formula that determines the optimal fraction of your account to risk based on your win rate and average win/loss ratio. Scaling in: Start with a partial position and add as the trade confirms your thesis.

AskTrade’s Risk Assessment Agent calculates optimal position sizes for every trade setup based on the stop loss distance and your risk parameters.

Disclaimer: This is for educational purposes only and does not constitute financial advice. Trading involves significant risk of loss.

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AskTrade analyses are AI-generated and do not constitute financial advice.