Position sizing is a critical aspect of risk management in trading. Here's how I approach it based on my experience:
- Fixed Percentage Risk:
I allocate a fixed percentage of my total capital to each trade, typically around 1-2%. This means I calculate my position size based on the distance between my entry point and stop-loss level, ensuring that even a losing trade won’t wipe out my account.
For example: Trading Capital: ₹10,00,000Risk per trade: 1% = ₹10,000
If stop-loss is ₹50 per share, I would buy 200 shares (₹10,000 ÷ ₹50). - Volatility-Based Sizing:
I adjust my position size based on the stock’s volatility, often measured by indicators like ATR (Average True Range). For more volatile stocks, I reduce the position size since they have larger price swings. For less volatile stocks, I can afford a slightly larger position. - Kelly Criterion (with caution):
While not used for every trade, the Kelly Criterion gives an idea of the optimal position size based on past winning probability and average return. However, I apply a fractional Kelly (like half or quarter of the result) to avoid overleveraging. - Pyramiding:
On trades where the market moves in my favor, I sometimes add to winning positions, but only if it aligns with the original trend analysis. The added positions always have tighter stop-losses to protect gains. - Account Risk vs Trade Risk:
I separate these concepts: Account Risk: What percentage of my account I’m willing to risk overall (e.g., 5-10% max in multiple open positions). Trade Risk: Individual position sizing to limit losses to 1-2% per trade. - Dollar Amount Per Trade:
For consistency, I cap my position sizes to specific amounts. For instance, I don’t allocate more than ₹1,00,000 to a single stock unless I have a strong conviction. - Portfolio Heat:
When trading multiple setups, I ensure that the cumulative risk (all open positions combined) doesn’t exceed 6-8% of my account equity.
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