Position Sizing: The Math That Separates Winners from LosersMost traders blow up their accounts not because of bad entries, but because of terrible position sizing. You can have a 60% win rate and still go broke if you risk too much per trade.
The 1-2% Rule (And Why It Works)
Never risk more than 1-2% of your account on a single trade.
Here's why this matters:
Risk 2% per trade → You can survive 50 consecutive losses
Risk 10% per trade → 10 losses = -65% drawdown (you need +186% just to break even)
Risk 20% per trade → 5 losses = game over
The Position Sizing Formula
Position Size = (Account Size × Risk %) / (Entry Price - Stop Loss)
Real Example:
Account: $10,000
Risk per trade: 2% = $200
Entry: $50
Stop loss: $48
Risk per share: $2
Position Size = $200 / $2 = 100 shares
If stopped out → You lose exactly $200 (2%)
If price hits $54 → You make $400 (4% gain, 2:1 R/R)
Different Risk Frameworks
Conservative (1% risk)
Best for: Beginners, volatile markets, high-frequency trading
Survivability: Can take 100+ losses
Growth: Slower but steady
Moderate (2% risk)
Best for: Experienced traders, tested strategies
Survivability: 50 consecutive losses
Growth: Balanced risk/reward
Aggressive (3-5% risk)
Best for: High conviction setups, smaller accounts trying to grow
Survivability: 20-33 losses
Growth: Faster but dangerous
Warning: Never go above 5% unless you're gambling, not trading.
The Kelly Criterion (Advanced)
For traders with significant backtested data:
Kelly % = Win Rate -
Example:
Win rate: 55%
Avg win: $300
Avg loss: $200
Win/Loss ratio: 1.5
Kelly % = 0.55 - = 0.55 - 0.30 = 25%
But use 1/4 Kelly (6.25%) or 1/2 Kelly (12.5%) - Full Kelly is too aggressive for real markets.
Common Position Sizing Mistakes
❌ Revenge trading larger after a loss
✅ Keep position size constant based on current account value
❌ Risking the same dollar amount regardless of setup quality
✅ Risk 0.5% on B-setups, 2% on A+ setups
❌ Ignoring correlation risk
✅ If you have 5 tech stocks open, you're really risking 10% on one sector
❌ Not adjusting after drawdowns
✅ If account drops 20%, your 2% risk should recalculate from new balance
The Volatility Adjustment
In high volatility (VIX > 30):
Cut position sizes by 30-50%
Widen stops or risk less per trade
Market can gap past your stops
In low volatility (VIX < 15):
Can use normal position sizing
Tighter stops possible
More predictable price action
My Personal Framework
I use a tiered approach:
High conviction setups (A+): 2% risk
Good setups (A): 1.5% risk
Decent setups (B): 1% risk
Experimental/learning: 0.5% risk
Maximum combined risk: Never more than 6% across all open positions.
The Bottom Line
Position sizing is the only thing you have complete control over in trading. You can't control:
Where price goes
Market volatility
News events
But you CAN control how much you risk.
The traders who survive long enough to get good are the ones who master position sizing first.
What's your current risk per trade? Drop it in the comments. If it's above 5%, we need to talk.
