Discover how traders use position sizing to control risk and optimise capital allocation during trades.
Position sizing is a fundamental component of risk management in trading and investing. It determines how much capital a trader should allocate to a single trade based on their risk tolerance, account size, and the volatility of the asset being traded. Proper position sizing helps traders minimise losses, protect their capital, and maintain long-term consistency. This article explains how position sizing works, popular methods used by traders, and how to apply them practically.
Position sizing refers to the process of determining the number of units or value of a security to trade, based on the amount of capital one is willing to risk. It ensures that a trader does not expose their entire account to unnecessary losses during a single transaction. The goal is to strike a balance between risk and reward without compromising portfolio sustainability.
Position sizing plays a critical role in preserving capital and ensuring long-term trading success:
It limits the percentage of capital at risk in each trade.
It enforces discipline by removing emotional decision-making.
It helps manage volatility and prevents large drawdowns.
It allows traders to stay in the game even after a string of losses.
Understanding how position sizing works requires knowledge of several essential factors:
This is the amount a trader is willing to lose in a single trade. It is typically expressed as a percentage of the total trading capital. For example, if a trader decides to risk 1% per trade on a ₹5,00,000 portfolio, the maximum allowable loss would be ₹5,000.
A stop-loss is a predefined price level where a trade is exited to prevent further loss. The distance between the entry price and the stop-loss defines the risk per share or unit in the trade.
A basic formula to calculate position size is:
Position Size = Capital at Risk / Risk per Unit
For example, if the capital at risk is ₹5,000 and the difference between entry and stop-loss is ₹10, the trader can buy 500 units (₹5,000 ÷ ₹10).
Intraday traders rely heavily on CPR to set stop-loss and target prices:
Support and Resistance: TC acts as a resistance level, and BC acts as support.
Breakout Signals: Price crossing above TC can signal a bullish breakout; falling below BC may indicate bearish momentum.
Trend Confirmation: Trading above or below the CPR helps confirm the prevailing trend.
Several techniques are used to calculate the appropriate position size. The choice depends on the trader’s style, risk appetite, and market conditions.
This strategy allocates a fixed percentage of capital to each trade:
Most traders risk between 1% to 2% of their capital per trade.
Ensures controlled exposure and reduces the risk of blowing up the account.
Example:
If you have ₹10,00,000 and want to risk 1%, your capital at risk per trade is ₹10,000.
This method adjusts the position size based on asset volatility. Highly volatile stocks will have smaller position sizes and vice versa.
Uses indicators like Average True Range (ATR) to determine stop-loss distance.
Helps manage risk in fast-moving or unpredictable markets.
A more advanced method, the Kelly Criterion calculates the optimal bet size based on past win probability and payoff ratio. While theoretically sound, it is highly aggressive and less commonly used in its full form due to its potential for large drawdowns.
In this approach, the same capital is allocated to each trade regardless of risk or volatility. While simple to execute, it can lead to inconsistent risk exposure and is not ideal for professional trading.
Assume you have ₹2,00,000 in capital, and you're willing to risk 1.5% per trade:
Capital at risk: ₹2,00,000 × 1.5% = ₹3,000
You want to buy a stock at ₹200 and place a stop-loss at ₹190 (₹10 risk per share)
Position size = ₹3,000 ÷ ₹10 = 300 shares
This ensures that even if the trade hits the stop-loss, your loss is capped at ₹3,000.
Poor position sizing can lead to avoidable losses and inconsistent results. Common mistakes include:
Risking too much capital in a single trade, which can erode gains quickly
Ignoring stop-loss levels, leading to undefined risk
Overconfidence after wins, resulting in oversized positions
Negaecting market volatility, which skews position sizes in unpredictable ways
Sticking to a structured approach keeps emotions in check and enhances risk-adjusted returns.
Position sizing is not just a tool — it is the cornerstone of risk management in trading. Whether you're a beginner or an experienced trader, applying proper position sizing techniques ensures that losses remain manageable and trading capital is preserved. By adjusting position sizes based on risk appetite, market volatility, and account size, investors can create a disciplined, sustainable trading strategy.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Common guidance suggests beginners often limit risk to around 1% of trading capital.
Position sizing and entry strategy both matter. A well-sized position can limit losses from a poor entry, while a good entry can improve return potential—both elements are components of an effective trading plan.
Using the same position size for every trade is possible, but it may ignore volatility and stop-loss differences, making a fixed percentage or volatility-based method more effective.
Not using a stop-loss leaves risk undefined and may expose positions to significant losses, especially in leveraged trades or adverse market conditions.
Position sizing applies to long-term investing because allocating capital wisely across stocks prevents overconcentration and reduces portfolio risk.