Position Sizing: The Only Edge That Actually Matters

You have a 60% win rate. Your friend has a 40% win rate.

Who makes more money?

The answer isn't who you think. It's whoever sizes their positions correctly.

This lesson teaches you the single most important concept in trading: position sizing is the only edge that matters.

Expectancy Is Everything

Here's the brutal truth: Your win rate is irrelevant. What matters is expectancy—how much you make per trade on average.

The Math That Changes Everything

Expectancy Formula:

Expectancy = (Win Rate × Avg Win) - (Loss Rate × Avg Loss)

The lesson: Trader B is wrong 60% of the time but makes almost 3x per trade because his winners are bigger than his losers.

This is why professional traders focus on risk/reward ratio and position sizing, not win rate.

Risk the Same Percentage Every Time

The simplest and most effective position sizing method: risk a fixed percentage of your account on every trade.

The 1% Rule

Rule: Never risk more than 1% of your account on a single trade.

Why 1%?

• You can lose 10 trades in a row and only be down 10% (recoverable)
• You can lose 20 trades in a row and only be down 18% (still alive)
• Forces discipline—no emotional "all-in" bets
• Allows your edge to play out over hundreds of trades

The Position Sizing Formula

Position Size = (Account Size × Risk %) / (Entry Price - Stop Loss Price)

Not: "Buy as many shares as I can afford"

But: "Buy exactly the number of shares that risks 1% if my stop is hit"

Scale to Market Volatility

The 1% rule works, but it doesn't account for market volatility. A stock that moves $5/day needs different sizing than one that moves $0.50/day.

Enter ATR-based position sizing.

What Is ATR (Average True Range)?

ATR measures the average price movement over the last 14 periods. It's a volatility indicator.

• High ATR (e.g., $5): Stock is volatile, big daily swings
• Low ATR (e.g., $0.50): Stock is calm, small daily swings

Why this matters: Your stop loss should be based on volatility, not arbitrary percentages.

ATR-Based Stop Placement

Rule: Place your stop 2× ATR away from your entry (beyond key structure).

Why 2× ATR?

• 1× ATR = too tight, you'll get swept by normal volatility
• 2× ATR = gives breathing room while still invalidating your thesis if hit
• 3× ATR = too wide, risking too much capital

The Complete ATR Sizing Process

Here's how to combine ATR-based stops with fixed fractional sizing:

Step 1: Grade Your Setup

A-grade: 3+ confluences (sweep + absorption + HTF alignment) → Risk 2%

B-grade: 2 confluences (clean structure + confirmation) → Risk 1%

C-grade: 1 or fewer confluences → SKIP THE TRADE

Never risk the same amount on every trade. High-conviction setups deserve larger size.

Step 2: Calculate Your Stop Distance

ATR (14-period): $1.00

Stop placement: 2× ATR beyond structure = $2.00

Why 2× ATR? Because 1× ATR gets you swept. 2× ATR gives you breathing room.

So your stop is $2.00 away from potential entry.

Step 3: Calculate Position Size

Position Size = $200 / $2.00 = 100 shares

Example entry: $100.00

Example stop: $98.00 (2× ATR below)

Position size: 100 shares

If stopped: 100 shares × $2.00 loss = $200 loss (exactly 2% of account)

Don't Blow Up in One Session

Here's a mistake that kills accounts:

Trader opens 5 positions, each risking 2%. Total risk: 10%.

Bad news hits. All 5 stop out. Account down 10% in one session.

Common practice involves 3 times and you're done.

Example:

If you're at 5.5% heat, DO NOT take a new trade until one closes.

This rule alone will save your account from catastrophic drawdowns.

The Step-by-Step System

Here's exactly how to size every trade:

How NOT to Size Positions

Mistake #1: Fixed 1% on Every Trade

Bad: "I always risk 1%, no matter what."

Why it fails: You're treating A-grade and C-grade setups the same

Fix: Scale to setup quality (A=2%, B=1%, C=skip)

Mistake #2: Ignoring ATR

Bad: "I'll just risk $200 per trade, always."

Why it fails: Fixed dollar amount doesn't account for volatility

Fix: Calculate position size based on ATR stop distance

Mistake #3: Oversizing Because "It's a Sure Thing"

Bad: "This setup is SO good, I'm going 10%!"

Why it fails: Even A-grade setups fail 30-40% of the time

Fix: Max risk per trade = 2%, no exceptions

Mistake #4: No Portfolio Heat Limits

Bad: "I see 5 good setups, taking them all at 2% each."

Why it fails: Correlated risk = 10% drawdown if all fail

Fix: Max portfolio heat = 6% across all positions

Mistake #5: Emotional Position Sizing After Losses

Bad: "I just lost 2% on that last trade. I'm going 5% on this next one to get back to even faster."

Why it fails: Revenge sizing magnifies losses. If you lose that 5% position, you're now down 7% total—a hole that requires a 7.5% gain just to break even. The math works against you: A 10% loss requires an 11.1% gain to recover. A 20% loss requires a 25% gain. A 50% loss requires a 100% gain. Every percentage point of drawdown makes recovery exponentially harder.

The deadly cycle:

• Trade 1: Risk 2%, lose -$1,000 (account: $50K → $49K)
• Trade 2 (emotional): Risk 5% trying to recover, lose -$2,450 (account: $49K → $46,550)
• Trade 3 (desperate): Risk 8% trying to recover, lose -$3,724 (account: $46,550 → $42,826)
• Result: 3 trades, -14.3% drawdown ($50K → $42,826). Now need +16.7% gain just to break even.

Fix: NEVER increase position size after a loss. If anything, decrease size temporarily. After 2 consecutive losses, consider reducing risk to 0.5% per trade for the next 5 trades to rebuild confidence and protect capital. Position sizing must be mechanical, not emotional. The moment you deviate from your plan after a loss, you've entered the danger zone where small drawdowns become account-ending spirals.

⚡ Quick Wins for Tomorrow (Click to expand)

Don't overwhelm yourself. Start with these 3 actions:

1. Calculate next trade size — Before entering: (Account × 2%) ÷ (Entry - Stop) = Position Size. Write it down.
2. Grade your setup — A-grade = 2% risk. B-grade = 1% risk. C-grade = skip entirely.
3. Check portfolio heat — Add up all open position risks. If >6%, close something or wait.

After 10 trades with calculated position sizing, you'll see the difference. Wins will be bigger on A-grades, losses will be controlled. This is how you build compounding.

Position sizing isn't sexy. It's not exciting. But it's the difference between surviving 10 years in the market and blowing up in year 1.

Educational only. Trading involves substantial risk of loss. Past performance does not guarantee future results.