What Are "Position Sizing" Stocks?

Position sizing helps a trader to limit the amount of loses made in trading. Position sizing is the part of your investing strategy that helps you decide how much to place into any one investment, how many shares to buy and how much risk your portfolio will bare in each trade. It is a powerful investing concept. This article will explained position sizing in simple terms, the benefits and the ways in which to incorporate it.

Learn from great traders. The most successful investors used position sizing by putting only a little part of their money (2-3%) at risk on one idea. They use position sizing to control risk. Position sizing incorporates using the stop loss and the maximum loss. The stop loss determines the highest amount of money to be lost while position sizing determines how many units of stock you are capable of purchasing thereby limiting the risk on the entire
portfolio.

1. For example, if you have a $40,000 portfolio with a 2% risk model and 10% stop loss. 2% risk model means you will risk only 2% ($800) of your portfolio per trade. Then you can buy only $8,000 of stock and risk $800 (2% of your%40,000). If let us say the stock price is $8, you can buy only 1000 units. This is position sizing.

Stock price of $8
Portfolio size of $40,000
Risk Model of 2% per trade
The stop loss is 10%
Total risk is $800 (2% of $40,000)
Amount to trade at 10% stop loss is $8,000
Total shares is 1000 units
(Variables such as slippage, commissions, etc are not considered)

Position sizing therefore effectively determines the amount of shares a trader can buy without exceeding their maximum loss. With this example, even novice investors can properly position size their trades without risking too much on one position. You will be prepared regardless of what happens with any one position. You will never worry about taking big losses.

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