Position Sizing
Definition
The process of determining how many shares or contracts to trade based on risk parameters.
Detailed Explanation
Position sizing calculates the appropriate number of shares to trade based on your account size, risk tolerance, and the distance to your stop loss. The formula is: Position Size = Dollar Risk ÷ Risk Per Share. For example, risking $200 with a $4 stop distance means buying 50 shares. Proper position sizing ensures consistent risk across all trades regardless of stock price or volatility.
Example
$50K account, 1% risk = $500. Entry at $100, stop at $95 = $5 risk per share. Position size = $500 ÷ $5 = 100 shares.