Position sizing is arguably the most important aspect of trading that nobody talks about. You can have the best strategy in the world, but if your position sizes are wrong, you will eventually blow up your account. Let us explore the most common position sizing mistakes and how to avoid them.
What Is Position Sizing?
Position sizing determines how much capital you allocate to each trade. It answers the question: "How many shares, contracts, or lots should I buy or sell?" The answer to this question has more impact on your long-term results than any other trading decision.
Key insight: A mediocre strategy with excellent position sizing will outperform an excellent strategy with poor position sizing over time. Risk management trumps entry signals every single time.
Mistake #1: Betting Too Big on Single Trades
The most common and destructive position sizing mistake is risking too much on a single trade. Many traders risk 10%, 20%, or even more of their account on what they believe is a "sure thing."
Why This Destroys Accounts
Even the best traders are only right 50-60% of the time. If you risk 20% per trade, five losses in a row (which is statistically guaranteed to happen) wipes out your entire account. The math is unforgiving:
- 5 losses at 20% each: 100% - 80% - 64% - 51.2% - 40.9% - 32.7% = 67.3% drawdown
- To recover from a 67% loss, you need a 203% gain
- This is nearly impossible for most traders
The Solution
Professional traders typically risk 1-2% of their account per trade. This means even a devastating losing streak of 10 trades only costs 10-20% of the account, which is recoverable.
Proper Position Sizing Example
Account size: $50,000
Risk per trade: 1% = $500
Stop loss: $2 per share
Position size: $500 / $2 = 250 shares
If the stock is $100, total position value is $25,000 (50% of account)
But your actual risk is only $500 (1% of account)
Mistake #2: Using Fixed Share or Contract Sizes
Many traders use the same number of shares or contracts for every trade regardless of the stock price, volatility, or their stop loss distance. This creates inconsistent risk exposure.
The Problem
If you always buy 100 shares:
- On a $10 stock with a $0.50 stop, you risk $50
- On a $200 stock with a $5 stop, you risk $500
- Your risk varies by 10x between trades
The Solution
Calculate position size based on your risk amount and stop loss distance, not a fixed number of shares. This ensures every trade has the same dollar risk.
Mistake #3: Not Adjusting for Volatility
A $100 stock that moves 5% daily is very different from a $100 stock that moves 1% daily. Using the same position size for both means vastly different actual risk.
How to Adjust
Use ATR (Average True Range) to adjust your position size. More volatile stocks get smaller positions; less volatile stocks can have larger positions. This normalizes your risk across different instruments.
Volatility adjustment formula: Base Position Size / (Current ATR / Baseline ATR) = Adjusted Position Size
Mistake #4: Martingale and Doubling Down
Some traders double their position size after losses, thinking they are "due" for a win. This is the martingale system, and it is a guaranteed path to account destruction.
Why It Fails
- Losing streaks are longer and more frequent than intuition suggests
- Position sizes grow exponentially while account size shrinks
- Eventually, you cannot afford to place the next required bet
- Casinos use table maximums specifically because martingale works short-term
The Reality
A 10-trade losing streak requires a position 1,024 times larger than your starting position. No account can sustain this, and these losing streaks do happen.
Mistake #5: Sizing Up Too Quickly After Wins
After a winning streak, traders often dramatically increase position sizes. When the inevitable losses come, the larger positions devastate the account.
Better Approach
Increase position sizes gradually as your account grows. A common rule is to only increase size when your account reaches a new all-time high, and then only by a small percentage.
Mistake #6: Ignoring Correlation
Taking multiple positions in correlated assets (like tech stocks) effectively multiplies your risk. Five "1% risk" trades in correlated stocks might actually represent 5% risk if they all move together.
The Solution
Set portfolio-level risk limits in addition to per-trade limits. Never have more than 5-6% of your account at risk in correlated positions at the same time.
Calculate Your Position Sizes Automatically
Pro Trader Dashboard includes a position size calculator that factors in your account size, risk tolerance, and stop loss to give you exact share counts for every trade.
The Position Sizing Formula
Here is the formula every trader should memorize:
Position Size = (Account Size x Risk %) / Stop Loss Distance
Step-by-Step Calculation
- Determine your account size: $25,000
- Decide your risk percentage: 1%
- Calculate dollar risk: $25,000 x 0.01 = $250
- Identify stop loss distance: Stock at $50, stop at $48 = $2 risk per share
- Calculate position size: $250 / $2 = 125 shares
Summary
Position sizing mistakes are the silent killer of trading accounts. Betting too big, using fixed share sizes, ignoring volatility, martingale systems, sizing up too fast, and ignoring correlation all lead to account destruction. The solution is simple: risk a consistent small percentage (1-2%) of your account per trade, calculate position sizes based on stop loss distance, adjust for volatility, and monitor portfolio-level risk. Master position sizing and you will survive long enough to let your edge play out.
Learn more: risk per trade guide and position sizing formulas.