foundations · TRADING LEARNING GUIDE
Position sizing
What is this concept?
Sizing converts a risk budget into quantity: quantity = budget / estimated loss per unit. Futures require multipliers, tick values and currency conversion. Margin and trade risk differ.
Step by step
Choose equity and a risk fraction. Estimate stop distance plus costs, then round quantity down to a valid lot. Check combined portfolio risk; sizing alone does not create a profitable strategy.
From observation to decision
Record the instrument, venue, session and timeframe. Classify the observation using the definition, then write at least one alternative interpretation. Decide what evidence would invalidate your idea before entry. Mark missing information explicitly. Examples are hypothetical. Collect paper observations, including failures. Include fees, spread, slippage and timestamp alignment when measuring outcomes. Recognizing a chart shape and establishing a profitable trading rule are separate tasks.
Worked example
Equity ₹100,000 and risk 0.5% give ₹500. Entry 200, stop 195 and ₹1 costs imply ₹6 loss per share: floor(500/6)=83 shares, estimated risk ₹498.
Common mistakes and limits
Avoid sizing solely from leverage, keeping quantity fixed after changing the stop or omitting fees, lot rules and currency conversion.
Practice
Repeat with stop 190 and ₹2 allowance. Explain why stronger conviction does not automatically increase the budget.
Resources and further reading
These sources explain definitions and underlying mechanics. Worked examples are original illustrations; a source does not establish the profitability of a custom pattern.
Further reading / foundational context. Worked examples on this page are original illustrations, not source performance claims.