Reviewed by Aug 27, 2020| Updated on
Position sizing points to the total number of units held by a trader or investor in certain security. An investor’s risk-taking abilities and account size have to be necessarily considered by a financial planner or advisor when deciding on the position sizing.
Breaking Down Position Sizing
Position sizing is referred to as the size of the position held by an investor with respect to a particular security or portfolio. It is also referred to as the amount of money being traded in a given asset. Carefully analysing position sizing will provide means for investors to arrive at the number of units that they can purchase within the level of risk that they are ready to assume. This will help them earn maximum returns and at minimal risk. The term position sizing is a critical concept in almost all investment types, and it is generally linked with intra-day trading in the forex market (currency).
The investors or traders or investors have to determine their account risk in order to best utilise position sizing for a particular trade. This is generally represented as a percentage of their capital being invested. Generally, most traders or investors would not like to assume a risk of more than 2% of their capital in a particular trade, and the risk assumed by fund managers would be much lower than this.
The investors should then fund out as to where they should place their stop-loss order pertaining to trading a particular asset or security. If a trade is trading shares, then the trade risk is the difference between the stop-loss price and intended entry price. For instance, if a trade is willing to purchase a share at Rs 180, and likes to place the stop-loss order at Rs 150, then the trade of that trader is Rs 30 a share.