Question 1

What is position sizing and why does it matter?

Accepted Answer

Position sizing is the process of determining how much capital to allocate to a single trade. It is one of the most critical aspects of risk management because it directly controls how much you can lose on any given trade. Proper position sizing ensures that no single trade can significantly damage your account, allowing you to survive losing streaks and stay in the game long enough for your edge to play out.

Question 2

What is the 1% rule in trading?

Accepted Answer

The 1% rule is a widely adopted risk management guideline that states you should never risk more than 1% of your total trading account on a single trade. For example, if your account is $10,000, you would risk a maximum of $100 per trade. This means your stop loss and position size should be calibrated so that if the trade hits your stop loss, you lose no more than $100. This rule helps prevent catastrophic drawdowns and is recommended by most professional traders.

Question 3

How does leverage affect position sizing?

Accepted Answer

Leverage allows you to control a larger position with less capital, but it does not change the dollar amount at risk. If your position size calculator says you should take a $5,000 position, you can do so with $5,000 at 1x leverage, $2,500 at 2x leverage, or $500 at 10x leverage. The key difference is the required margin (collateral). Higher leverage means less margin required, but your stop loss distance and risk amount remain the same. However, higher leverage positions also have closer liquidation prices, adding another layer of risk.

Question 4

How do I set a proper stop loss for position sizing?

Accepted Answer

Your stop loss should be placed at a price level where your trade thesis is invalidated, not at an arbitrary percentage. Common approaches include placing stops below key support levels (for longs), above resistance levels (for shorts), below recent swing lows, or at a level based on average true range (ATR). Once you have determined your stop loss level, use the position size calculator to determine the correct position size that keeps your risk within your defined percentage.

Question 5

What risk percentage should I use per trade?

Accepted Answer

Most professional traders risk between 0.5% and 2% per trade. Beginners should start at 0.5% to 1% to build discipline and protect their capital during the learning phase. As you develop a proven track record with a positive expectancy, you may consider slightly higher percentages, but rarely above 3%. The lower the risk percentage, the more trades you can endure before a significant drawdown. For example, at 1% risk, you would need 10 consecutive losses to lose 10% of your account.

Question 6

What is the difference between position size and required margin?

Accepted Answer

Position size is the total notional value of your trade, representing the full exposure in the market. Required margin is the actual capital you need to post as collateral to open that position. For example, with a $10,000 position at 10x leverage, your required margin is only $1,000. However, if the trade goes against you and hits your stop loss, your loss is calculated on the full position size, not just the margin. This is why position sizing based on risk amount is more important than thinking in terms of margin alone.

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