What Is Position Sizing?
Position sizing determines how large your position should be based on your risk.
The basic process is:
- Determine account size.
- Determine risk percentage.
- Calculate your monetary risk.
- Determine stop-loss distance.
- Calculate appropriate position size.
Example
Account = £10,000
Risk = 1%
Maximum planned loss = £100.
If your stop is relatively close, you may be able to use a larger position.
If your stop is further away, you need a smaller position to maintain the same monetary risk.
This is why position size should not be chosen first.
Key Takeaways
Stop distance and position size work together.
A wider stop generally requires a smaller position.
A tighter stop generally allows a larger position for the same planned monetary risk.
Always use an appropriate position-size calculator and verify the result for the specific instrument you’re trading.
Disclaimer
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
