Position sizing

Most people spend their time on what to buy. Position sizing is how much, and it has a bigger effect on how you end up.

Two people can trade the identical strategy, take the identical trades, and one finishes the year up comfortably while the other has given up. The difference is size.

The basic calculation

Work backwards from what you’re willing to lose, not forwards from what you hope to make.

Say your account is $20,000 and you decide no single trade should cost you more than 1% of it — $200. You want to buy a stock at $50 and your stop goes at $45, so you’re risking $5 a share.

$200 ÷ $5 = 40 shares. That’s a $2,000 position.

Notice what happened: the position size fell out of the risk, rather than the risk falling out of some round number of shares you fancied. A wider stop means fewer shares, not more risk.

Why 1% rather than 10%

Because losing streaks are longer than people expect. Even a good strategy will lose six or seven in a row eventually. At 1% each, that’s an unpleasant week. At 10% each, it’s most of your account, and the arithmetic of recovering is brutal:

You lose	You need to make it back
10%	11%
25%	33%
50%	100%
75%	300%

Losses and gains aren’t symmetrical. Halve your account and doubling it only gets you level.

In BotStock

Two account-wide ceilings sit above whatever your strategies want to do: a maximum dollar amount per trade, and a maximum percentage of your equity per position. A strategy can size below them; nothing can size above them.

They’re worth setting deliberately rather than leaving at whatever they came with. They are the only numbers in the product that cap how wrong a single idea can go.