Position sizing is arguably the most important aspect of trading, yet it is often overlooked or done incorrectly. You can have a profitable strategy and still blow up your account if your position sizing is wrong. In this guide, we will cover the most common position sizing mistakes and how to avoid them.
Why Position Sizing Matters
Position sizing determines how much of your capital you risk on each trade. Get it wrong, and even a winning strategy will fail. Get it right, and you can survive losing streaks and compound your gains over time.
The truth about trading: Your entry and exit strategy determine your edge. Your position sizing determines whether you survive long enough to realize that edge.
Mistake 1: Betting the Same Dollar Amount on Every Trade
Many beginners buy the same dollar amount of every stock: $1,000 of Stock A, $1,000 of Stock B. This seems logical but ignores the different risk profiles of each trade.
Example: Same Dollar, Different Risk
Trade A: Buy $1,000 of Stock at $50, stop at $48 (4% risk = $40 at risk)
Trade B: Buy $1,000 of Stock at $100, stop at $85 (15% risk = $150 at risk)
Despite investing the same amount, Trade B has 3.75x more risk. Your position sizing should account for this difference.
The Fix
Size positions based on the dollar risk, not the investment amount. Decide how much you are willing to lose per trade, then calculate position size from your stop distance.
Mistake 2: Risking Too Much Per Trade
The most common position sizing mistake is risking too much. Traders often risk 10%, 20%, or even 50% of their account on a single trade, not realizing how quickly losses compound.
Example: The Impact of Large Risk
Starting account: $10,000, risking 20% per trade
After 3 consecutive losses:
- Trade 1 loss: $10,000 - $2,000 = $8,000
- Trade 2 loss: $8,000 - $1,600 = $6,400
- Trade 3 loss: $6,400 - $1,280 = $5,120
After just 3 losses, you have lost 48% of your account. You now need a 92% gain to recover.
The Fix
Risk 1-2% of your account per trade maximum. This allows you to survive inevitable losing streaks while still making meaningful profits on winners.
Mistake 3: Ignoring Correlation
Traders often think they are diversified because they have multiple positions. But if all positions are in the same sector or move together, you effectively have one large position.
Example: False Diversification
Trader has 5 positions, each risking 2% of account:
- Long Apple (tech)
- Long Microsoft (tech)
- Long Google (tech)
- Long Amazon (tech)
- Long Meta (tech)
Total tech risk: 10% of account. When tech sells off, all 5 positions lose simultaneously. The effective risk is 10%, not 2%.
The Fix
Track your sector and correlation exposure. Limit total risk in correlated positions. True diversification means positions that move independently.
Mistake 4: Increasing Size After Losses
After a losing streak, it is tempting to increase position size to "win back" losses faster. This is called the martingale approach, and it is how accounts blow up.
The Fix
Keep position sizing consistent or actually reduce size after losses. If you lose 10% of your account, your 1% risk should be 1% of your new, smaller account balance.
Mistake 5: Increasing Size After Wins
The opposite mistake is also common: sizing up aggressively after wins. While your risk amount should increase proportionally with your account, sudden large increases can give back all your gains in one trade.
The Fix
Increase position size gradually as your account grows. A good rule is to recalculate your risk amount weekly or monthly, not after every trade.
Mistake 6: Not Accounting for Volatility
A 5% stop on a volatile stock is different from a 5% stop on a stable stock. The volatile stock is more likely to hit your stop on normal fluctuations.
Example: Volatility Matters
Stock A: Average daily range 0.5%, stop at 5% = 10 days of normal movement
Stock B: Average daily range 3%, stop at 5% = less than 2 days of normal movement
Stock B's stop will be hit by random noise much more often.
The Fix
Use ATR-based stops and position sizing. Volatile stocks get wider stops and smaller positions; stable stocks get tighter stops and larger positions. Total dollar risk stays constant.
Mistake 7: Averaging Down Without a Plan
Averaging down (buying more as price falls) can make sense in certain situations. But most traders do it without a plan, essentially doubling down on a losing position.
The Fix
If you plan to average down, include it in your initial position sizing. Your first entry should be half your intended position, with the second half planned at a specific price. Total risk should still be within your per-trade limit.
Mistake 8: Using Margin Irresponsibly
Margin allows you to trade with more than you have. This amplifies both gains and losses. Many traders use full margin on every trade, dramatically increasing their risk.
Example: Margin Amplification
Account: $25,000, 4x day trading margin = $100,000 buying power
Trade full margin on a stock that drops 3%:
- Loss: $100,000 x 3% = $3,000
- Percentage of account: 12%
A 3% move wiped out 12% of your account.
The Fix
Calculate position size based on your actual account equity, not your buying power. Margin should only be used when your position sizing rules call for it, not by default.
The Correct Approach to Position Sizing
- Define your risk per trade: Typically 1-2% of account
- Determine your stop loss: Based on technical levels and volatility
- Calculate position size: Risk Amount / Stop Distance = Shares
- Check correlation: Ensure total correlated risk is acceptable
- Execute the trade: Enter at your planned size, not more
Analyze Your Position Sizing
Pro Trader Dashboard helps you track your position sizing across all trades. See if you are staying within your risk limits and identify sizing errors before they become costly.
Summary
Position sizing mistakes are silent account killers. You can have a profitable strategy and still lose money if your sizing is wrong. The most common mistakes include betting fixed dollar amounts, risking too much per trade, ignoring correlation, and misusing margin. Fix these errors by sizing based on dollar risk, limiting per-trade risk to 1-2%, tracking correlation, and using only the margin your strategy requires.
Remember: position sizing is not about maximizing profits on any single trade. It is about surviving long enough to let your edge play out over hundreds of trades.