Position sizing determines how much capital is allocated to a single trade, and it is one of the primary tools for managing risk at the account level.
The core idea
Rather than risking a fixed number of shares or contracts, many traders define risk as a small percentage of total account equity per trade — commonly a low single-digit percentage — so that no individual trade can cause disproportionate damage.
Why this matters over a series of trades
Trading involves a sequence of outcomes, including losing streaks that are statistically normal even for a sound strategy. Position sizing determines whether a losing streak is a manageable setback or an account-threatening event.
A simplified illustration
An account risking a large percentage of equity on each trade can be severely impacted by just a handful of consecutive losses, while an account risking a small, consistent percentage per trade is far more resilient to the same losing streak — assuming everything else about the strategy is equal.
