Position sizing is the process of determining how much capital to put at risk in a single trade, expressed as a proportion of your total trading account.
It is distinct from the trade entry and exit decision. Entry and exit determine which trades you take and at what prices. Position sizing determines how much you lose when you are wrong.
Why It Matters More Than Entry
A trader with a 50% win rate who risks 1% per losing trade and gains 2% per winning trade will grow their account consistently. A trader with a 65% win rate who sizes positions randomly — sometimes risking 1%, sometimes 10% — will eventually hit a large loss that wipes out months of gains.
The mathematics is straightforward: a 20% loss requires a 25% gain just to return to the previous level. A 50% loss requires a 100% gain.
Consistent, small, defined losses are survivable. Large, random, unplanned losses are account-destroying.
The Basic Formula
Risk amount = Account value × Risk percentage (typically 1–2%)
Position size = Risk amount ÷ (Entry price − Stop-loss price)
Example: Account ₹5,00,000, risk 1% = ₹5,000. Stock entry ₹800, stop-loss ₹760. Per-share risk = ₹40. Position size = ₹5,000 ÷ ₹40 = 125 shares.
If the stop-loss is hit, the loss is 125 × ₹40 = ₹5,000 — exactly 1% of the account.
In F&O
For options, the same principle applies using the premium as the risk unit. If you buy a Nifty call at ₹120 and plan to exit if it falls to ₹50, your per-lot risk is (₹120 − ₹50) × 50 lots = ₹3,500. At 1% risk on ₹5,00,000 (₹5,000), you can buy 1 lot with risk to spare.
For futures, the margin required is not the risk. The distance from entry to stop-loss, multiplied by the lot size, is the actual risk.
Starting Point
If you have never used systematic position sizing, start at 0.5% per trade. The losses will feel small enough to be non-threatening, making it easier to follow the system rather than override it. Build the habit before scaling.
For educational purposes only. Profitma is not a SEBI-registered investment adviser or research analyst. Nothing in this article constitutes investment advice.