Advanced Position Sizing Strategies
Position sizing is one of the most crucial yet often overlooked aspects of trading. Learn how to size your positions for optimal risk management and performance.
Fixed Risk Position Sizing
This method risks the same dollar amount on each trade:
Example: If you risk $500 per trade on a $50,000 account, that's 1% risk per trade regardless of the stock's price or volatility.
Volatility-Based Sizing
Adjust position size based on the stock's volatility:
- Use Average True Range (ATR) to measure volatility
- Smaller positions for higher volatility stocks
- Larger positions for lower volatility stocks
- Maintain consistent dollar risk across different volatilities
Advanced Techniques
Consider these advanced position sizing methods:
- Kelly Criterion for optimal position sizing
- Scaling in and out of positions
- Portfolio heat-based position sizing
- Market correlation adjustments