Risk & process
Position Sizing
How much capital to risk on a trade — the bridge between a signal and account survival.
What it is
Position sizing is the process of determining how much capital to risk on a single trade. It's a critical risk management tool that helps protect your account from large losses. Common approaches include risking a fixed percentage of capital (e.g., 1-2%) or using volatility-based sizing.
Why it matters
Proper position sizing is essential for long-term trading success. Even with a winning strategy, poor position sizing can lead to account blowups. Good position sizing ensures that no single trade can significantly damage your account, allowing you to stay in the game long enough to benefit from your edge.
How traders use it
Risk only a small percentage of your account per trade (typically 1-2%). Calculate position size based on your stop loss distance. If you have a $10,000 account and risk 1% ($100), and your stop is $10 away, you can buy 10 units. Always know your risk before entering a trade.
Example
If you have a $50,000 account and risk 1% per trade ($500), and gold is at $2,000 with a stop at $1,980 ($20 risk per ounce), you could buy 25 ounces. This ensures that even if you're wrong, you only lose 1% of your account.
Deeper context
Volatility-based sizing (for example ATR stops) adapts to quieter versus wilder markets. Fixed fractional risk keeps emotional decisions from scaling size after a win streak. PositionAlpha’s signals do not include recommended size — that remains your process. A strong confluence reading with oversized risk is still a poor trade.
Related terms
Risk Management, Stop Loss, Risk/Reward