What Is Position Sizing and Why It’s Crucial for Survival

If you've been trading for a bit, you have probably heard the phrase “position sizing.” Although it sounds technical, it is only about how much of your money to risk in one trade. Think of it as like portion control when you eat—just like overeating one meal is bad for your health, over-trading in one trade is bad for your trading account.

Many traders focus on the entry and strategy, but the reality is that position sizing is what keeps you alive in the long run. You can have the best strategy on earth, but if you risk too much on a single trade, it only takes a bad streak to wipe you out.

The Simple Definition

Position sizing is the act of calculating how many units, lots, or shares you should trade, based on your account size, and the risk you are willing to take.

Let's say you have a $5,000 trading account, and you have decided you do not want to risk more than 2% of your account on one trade. This means your maximum risk per trade is $100. And if your stop loss is 50 pips away you can easily calculate how many lots you should trade, and if the stop loss is hit, you will only lose $100, not more.

Why It is Important

Position sizing is survival. Imagine two traders:

Trader A risks 20% of their account per trade.

Trader B risks 2% of their account per trade.If both traders were to experience five consecutive losing trades, Trader A would find himself in a nearly depleted position and Trader B would only be down 10%, still alive and capable of rebounding.

It’s not about completely avoiding losses (that would be irresponsible to suggest). It’s about having procedures in place to ensure no one loss or losing streak destroys your account balance

Consider the below table as a simplified example of how a different risk percentage will look on your account after 10 consecutive losing trades:

Looking at it this way, you see how risky larger position sizes can truly be. 65% of your account gone will require you to garner a return of nearly 200% just to get back to even! An uphill battle that no trader is interested in having to climb.

Not Only about the numbers 

It’s not only about the numeric aspect, it's a mind game also. This is another major benefit of a minor position size –, allowing for emotional balance. If you know you are only risking 1–2%, you can rest easier. You won’t feel the need to panic if the market goes against your position, and you won’t feel like you need “to just get it back” in one big amount. 

In contrast, if you simply risk too much of your account you are subjected to a roller coaster of emotions. You start breaking your rules. You start moving your stop loss. You start doubling down on the last losing trade. That is how a trader gets into the downward spiral for an account blow up.A Story to Keep in Mind

There was a trader I knew a long time ago who grew $2,000 into $8,000 in a matter of months. Pretty amazing, right? The downside: he had a risk level of about 20-30% of his account in one trade. It worked while that was the nature of the market he encountered, but when it went against him for one week, he lost everything. All the way back to $0 and emotionally shattered.

Conversely, think of the trader who grew her account by slowly doubling it over the course of two years, only risking 1% per trade in the process. Nothing flashy, but she still survived ultimately developed into a trader who was consistently confident in herself. We all know that surviving is the secret—profits are irrelevant if you aren't around to enjoy them.

How to Position Size Correctly

So let's keep it simple with a quick two-step rule of thumb:

1. Decide how much you are willing to risk that is a percentage of your total account. Typically traders risk around 1-2%.

2. Then calculate the appropriate lot size using your stop loss distance, so that in with exit gets hit your loss does not exceed your predetermined risk amount.

For example, if you have an account balance of $10,000 and your willing risk is 2% ($200) on a trade with a stop loss of 50 pips, then you need to determine a lot size that will make 50 pips equal to a loss of $200 in amount to correctly structure your position size.

In this manner, no matter how many trades you risk get close to a losing streak, there is a good chance you stay alive. Number one rule, just stay alive...

Final Thoughts

The position size is not as alluring as pinning down the entry or predicting where the price action will go after this current wave, but position size limitation will most likely be the backbone of every successful trader's career. We hear the term of your 'athletics a position' has the ability to shield you from each of the rapid up and down market volatility as well as protect you from the emotional fallout from looking to make money from both predictive options and 'paper loss' losses.

If you take-away one lesson: never risk so much when taking a position that one or a group of losing trades can ruin your trading account. The longest lasting traders are strategically protected capital for the long road rather than aimlessly hoping for bigger amounts of consistent money with the potential gains if all the stars line up. 

As you continue to learn about different strategies, approaches to psychology, or different methods to approach 'initial risk amount in trades', keep learning in the Learn section on wikilix for some practical touch and feel lessons, or more in-depth guides on trading It is all to help traders of all levels stay safer and stay in business.