Position sizing determines how much capital you allocate to each trade. It's often overlooked but can be the difference between success and ruin in trading.
Key Insight: Most traders obsess over entry signals but ignore position sizing. Yet position sizing has more impact on long-term results than any indicator.
Why Position Sizing Matters
| Impact | Description |
|---|---|
| Risk per trade | How much you can lose on a single trade |
| Portfolio volatility | How bumpy your equity curve is |
| Recovery ability | Can you recover from a losing streak? |
| Emotional control | Oversized positions cause panic |
Common Position Sizing Methods
Method 1: Fixed Percentage of Capital
Invest a fixed percentage of total capital per trade.
Example: Capital: ₹10,00,000 Position size: 10% Investment per trade: ₹1,00,000
| Percentage | Risk Level | Max Positions |
|---|---|---|
| 5% | Conservative | 20 |
| 10% | Moderate | 10 |
| 20% | Aggressive | 5 |
| 50%+ | Very Risky | 1-2 |
Method 2: Fixed Quantity
Buy a fixed number of shares regardless of price.
Example: Always buy 100 shares Stock A at ₹500 = ₹50,000 position Stock B at ₹2000 = ₹2,00,000 position
Problem: Fixed quantity doesn't account for stock price. You end up with unequal risk across positions.
Method 3: Risk-Based Sizing (Recommended)
Size positions based on your stop loss distance.
Formula: Position Size = (Capital × Risk %) / Stop Loss % Example: Capital: ₹10,00,000 Risk per trade: 1% (₹10,000) Stop loss: 5% Position Size = ₹10,000 / 0.05 = ₹2,00,000
The 1% Rule: Professional traders rarely risk more than 1-2% of capital on a single trade. This ensures survival through losing streaks.
Impact on Returns
| Position Size | Potential Return | Potential Drawdown | Emotional Impact |
|---|---|---|---|
| Small (5%) | Lower | Smaller | Easy to handle |
| Medium (10-20%) | Moderate | Moderate | Manageable |
| Large (50%+) | Higher | Severe | Stressful |
The Math of Ruin
Risking too much leads to ruin even with a good strategy:
Scenario: 50% win rate, 2:1 reward-risk Risking 25% per trade: Lose, Lose, Lose, Lose = 68% of capital GONE (0.75 × 0.75 × 0.75 × 0.75 = 0.32) Risking 2% per trade: Lose, Lose, Lose, Lose = 8% of capital gone (0.98 × 0.98 × 0.98 × 0.98 = 0.92)
Critical: Four consecutive losses can happen to ANY strategy. Size your positions to survive losing streaks.
Best Practices
- Start with smaller sizes when testing a new strategy
- Never risk more than 20-25% on a single position
- Consider correlation — 5 positions in the same sector = 1 big position
- Reduce size after consecutive losses
- Increase size gradually as strategy proves itself
In VivaTrades
Test different position sizing approaches:
- % of Capital: Set percentage allocation per trade
- Fixed Quantity: Set number of shares
Compare results with 50% vs 100% allocation to see how position sizing affects both returns and drawdowns.