Definition
Position Sizing
Position sizing is deciding how much capital to allocate to a single trade or stock, to control risk across the portfolio.
Even a great idea can ruin you if you bet too big. Position sizing rules, such as risking no more than 1-2% of capital on any single trade, ensure that a few losses don't wipe out the account. The size flows from your stop-loss distance and total capital.
For investors, position sizing means not over-concentrating in one stock or sector. It is arguably more important than stock selection for long-term survival, since it limits the damage from inevitable mistakes and black-swan events.
Related terms
- Risk-Reward RatioThe risk-reward ratio compares the potential loss of a trade to its potential gain, guiding whether a setup is worth taking.
- DiversificationDiversification is spreading investments across different assets, sectors and geographies so that poor performance in one does not sink your whole portfolio.
- Stop LossA stop loss is a pre-set order that triggers an automatic sell (or buy, for shorts) once a security hits a chosen price, capping your loss without you having to watch the screen.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.