Position sizing is one of the most important yet least discussed aspects of risk management.
Even with a great idea, poor position sizing can destroy capital.
Even with an average idea, good position sizing can protect and grow capital over time.
What Is Position Sizing?
Position sizing answers one critical question:
How much of your total capital should you allocate to a single trade or investment?
It is not about which stock to buy —
it is about how much you can afford to lose if you are wrong.
Why Position Sizing Matters More Than Accuracy
Many beginners focus on:
- Finding the “best stock”
- Predicting market direction
- Being right more often
Experienced market participants focus on:
- Limiting damage when wrong
- Staying emotionally stable
- Ensuring no single decision can ruin them
📌 You don’t need a high win rate — you need controlled losses.
The Golden Rule for Beginners
Never risk more than 1–2% of your total capital on a single idea.
This rule applies to:
- Trades
- Short-term investments
- Even long-term positions during uncertain phases
Simple Beginner Example
- Total capital: ₹1,00,000
- Maximum risk per trade (1%): ₹1,000
This means:
- Even if the trade fails, your loss is limited to ₹1,000
- You can make multiple mistakes and still survive
📌 Survival allows learning. Learning leads to growth.
Position Size vs Amount Invested (Important Distinction)
Many beginners confuse these two:
- Amount invested → Total money put into a stock
- Position size (risk) → Maximum loss if the idea fails
Example:
- You invest ₹20,000 in a stock
- Your stop loss limits loss to ₹1,000
Your risk is ₹1,000, not ₹20,000.
📌 Always calculate risk first, not investment size.
What Happens Without Position Sizing?
Common beginner mistakes:
- Going all-in on one idea
- Increasing position after losses
- Treating every trade as a “sure thing”
Result:
- One bad decision causes large damage
- Emotional stress increases
- Decision quality drops
📌 Big losses don’t come from bad ideas — they come from oversized positions.
Investor vs Trader Perspective
- Traders
- Use strict position sizing per trade
- Focus on short-term price movement
- Loss control is immediate
- Investors
- Use position sizing through diversification
- Avoid concentration in one stock or sector
- Review risk as fundamentals change
Different methods, same objective: risk control.
Advanced Insight (For Intermediate & Experienced Readers)
Professional risk managers think in terms of:
- Portfolio-level risk
- Correlation between positions
- Maximum drawdown tolerance
They ask:
“What is the worst-case damage to my capital if multiple things go wrong together?”
📌 Position sizing is portfolio protection, not just trade protection.
Key Takeaways from Lesson 3
- Position sizing defines survival
- Risk per idea should be limited
- Small losses preserve confidence
- Consistency beats aggression
- One trade should never decide your future
👉 Next Lesson: Stop Loss – Your Safety Net
👈 Go Back to Risk Management Overview