Position Sizing
How much to invest in each trade. Position sizing is the most important risk management tool.
The 2% Rule
Never risk more than 2% of your portfolio on a single trade.
Max Risk = Portfolio × 0.02
Example:
Portfolio: $100,000
Max Risk per Trade: $2,000
Calculating Position Size
Position Size = Risk Amount / Risk per Share
Risk per Share = Entry Price - Stop Loss
Example:
Portfolio: $100,000
Max Risk: $2,000
Entry Price: $50
Stop Loss: $45
Risk per Share: $5
Position Size = $2,000 / $5 = 400 shares
Position Value = 400 × $50 = $20,000
ATR-Based Position Sizing
Use ATR for volatility-adjusted sizing:
Risk per Share = 2 × ATR
Position Size = Risk Amount / (2 × ATR)
Example:
Portfolio: $100,000
Max Risk: $2,000
Entry Price: $50
ATR: $2.50
Risk per Share: $5 (2 × ATR)
Position Size = $2,000 / $5 = 400 shares
Position Size by Signal Strength
| Recommendation | Position Size |
|---|---|
| STRONG BUY | 100% of intended allocation |
| BUY | 75% of intended allocation |
| HOLD | No new positions |
| SELL | Reduce by 50% |
| STRONG SELL | Exit entirely |
Position Size by Volatility
Higher volatility = Smaller position
Volatility-Adjusted Size = Base Size × (Target Vol / Stock Vol)
Example:
Base Size: $10,000
Target Volatility: 20%
Stock Volatility (ATR%): 35%
Adjusted Size = $10,000 × (20% / 35%) = $5,714
Volatility Categories
| ATR % | Volatility | Position Adjustment |
|---|---|---|
| < 1% | Low | 125% of base |
| 1-3% | Normal | 100% of base |
| 3-5% | High | 75% of base |
| > 5% | Very High | 50% of base |
Portfolio Allocation Limits
| Limit Type | Maximum |
|---|---|
| Single Stock | 5% of portfolio |
| Single Sector | 25% of portfolio |
| Single Strategy | 40% of portfolio |
| Cash Reserve | 10-20% minimum |
Position Sizing Examples
Conservative Investor
Portfolio: $100,000
Risk Tolerance: 1% per trade
AAPL Trade:
Entry: $180
ATR: $4
Stop: $172 (2 ATR)
Risk per Share: $8
Max Risk: $1,000
Position: 125 shares ($22,500)
Moderate Investor
Portfolio: $100,000
Risk Tolerance: 2% per trade
AAPL Trade:
Entry: $180
ATR: $4
Stop: $172 (2 ATR)
Risk per Share: $8
Max Risk: $2,000
Position: 250 shares ($45,000)
Aggressive Investor
Portfolio: $100,000
Risk Tolerance: 3% per trade
AAPL Trade:
Entry: $180
ATR: $4
Stop: $172 (2 ATR)
Risk per Share: $8
Max Risk: $3,000
Position: 375 shares ($67,500)
Scaling Into Positions
Instead of entering full position at once:
Initial Entry: 50% of position
Add #1: 25% if price moves in your favor
Add #2: 25% on pullback to support
Benefits:
- Reduces risk if wrong
- Averages into better price
- Confirms trend before full commitment
Common Mistakes
❌ No position sizing - "I'll just buy 100 shares" ❌ Ignoring volatility - Same size for all stocks ❌ Too large positions - Risking 10%+ on one trade ❌ No stop-loss - Unlimited downside ❌ Averaging down losers - Adding to losing positions
Next: Stop-Loss Strategies →