Position sizing refers to the dimensions of an edge within a specific portfolio, or the dollar amount that an investor goes to trade. Investors use position sizing to assist determine what percentage units of security they will purchase, which helps them to regulate risk and maximize returns.
While position sizing is a crucial concept in most every investment type, the term is most closely related to day trading and currency trading (forex).
Position sizing refers to the amount of units invested during a particular security by an investor or trader. An investor’s account size and risk tolerance should be taken under consideration when determining appropriate position sizing.
Even with correct position sizing, investors may lose quite their specified risk limits if a stock gaps below their stop order .
Using correct position sizing involves weighing three various factors to work out the simplest course of action:
1. Account Risk
2. Trade Risk
3. Proper Position Size
Investors should remember that albeit they use correct position sizing, they’ll lose quite their specified account risk limit if a stock gaps below their stop-loss order.