Importance of Position Sizing

“Never make a bet you can’t afford to lose.” -Elliot Wolk.

It’s not enough to have an edge in order to succeed in trading. We need to use that edge optimally by employing good position sizing strategies. Position sizing in simple terms is how much of the account capital we put in a trade.

There are different models for position sizing; common practice among traders is to risk a fixed percentage of their account capital on any given trade while other strategies take into account the volatility of the instrument etc. There is not one correct method of position sizing. It all depends upon the trader’s willingness to take risks, his/her comfort level with large drawdowns, etc. A trader should trade only size with which he is comfortable psychologically.

Emotions will play bigger role in trades when we risk too much or too small. A common reason for booking profits early while not taking losses is large position sizing. Proper position sizing also helps a trader in being disciplined.

(Post contributed by Jitender Yadav)