Risk & returns
Position sizing decides how much capital or risk to allocate to one exposure. It shapes portfolio damage when the thesis, price path or execution goes wrong.
Make it click
Testing a new recipe with one serving risks little stock; using the whole pantry makes one mistake decisive. Confidence does not change the pantry's finite size.
Now put that into markets
Sizing may use capital percentage, loss budget, volatility or scenario exposure. Correlated positions must be considered together.
A stop distance does not define maximum loss when prices gap or liquidity vanishes. Leverage, options and currency require look-through exposure.
Start from tolerable portfolio loss under a realistic adverse scenario, then account for overlap and uncertainty. Record the sizing rule before the outcome.
False precision in volatility or stop assumptions can create hidden leverage. Small positions can still combine into one concentrated factor.
Takeaway
