Why Position Sizing Matters More Than Stock Picking
Many traders spend hours researching "what to buy" but ignore "how much to buy."
The truth is: Position sizing affects long-term returns far more than stock selection.
A 60% win-rate strategy with poor position sizing can still blow up. A 40% win-rate strategy with proper position sizing can still profit consistently.
Common Position Sizing Methods
1. Fixed Dollar Amount
Trade a fixed amount each time, e.g., $10,000 per trade.
Pros: Simple to execute Cons: Doesn't account for risk or account changes
2. Fixed Percentage
Use a fixed percentage of account, e.g., 10% per trade.
Pros: Automatically adjusts with account growth Cons: Position reduction during losing streaks may be too slow
3. Fixed Risk Method (Recommended)
Risk a fixed percentage of account per trade, e.g., max 2% risk per trade.
Formula: Position = (Account × Risk%) / (Entry - Stop Loss)
4. Kelly Criterion
Calculate optimal position based on win rate and reward-risk ratio:
f* = (p × b - q) / b
Note: Use 1/2 or 1/4 Kelly in practice.
Position Sizing by Personality Type
| Type | Single Trade Risk | Max Total Position | Notes |
|---|---|---|---|
| [STAR](/type/STAR) | 1-2% | 60-80% | Systematic, can handle higher |
| [STCR](/type/STCR) | 0.5-1% | 40-60% | Conservative, steady growth |
| [ITAR](/type/ITAR) | 1-1.5% | 50-70% | Flexible, control single trades |
| [ITAE](/type/ITAE) | 0.5-1% | 30-50% | Must strictly limit |
| [SLAR](/type/SLAR) | 2-3% | 70-90% | Long-term concentrated |
Key Principles
1. Never Go All In
No matter how confident, never exceed 20% on a single trade.
2. Consider Correlation
Holding multiple correlated positions equals increasing position size.
3. Adjust Based on Win Rate
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