You found a great setup. High probability, clear invalidation, perfect entry. You size up because you're confident.
It loses. Your account takes a 15% hit. Now you need a 17.6% gain just to break even.
This is how most traders blow up. Not from bad trades - from bad sizing.
Why Position Sizing Matters More Than Entries
Here's a truth that's hard to accept: you can have a 70% win rate and still blow your account. Conversely, you can have a 40% win rate and be consistently profitable.
The difference is position sizing.
If your winners average $100 and your losers average $300, that 70% win rate produces: (0.7 x $100) - (0.3 x $300) = $70 - $90 = -$20 per trade.
You're losing money while winning most of your trades.
Position sizing controls the other half of the equation - not just how often you win, but how much you win and lose when you do.
The Fixed Percentage Method
The simplest approach that actually works: risk a fixed percentage of your account on each trade.
Most professional traders use 1-2%. Let's use 1%.
The formula:
Position Size = (Account Risk) / (Trade Risk per Share)
Example:
- Account: $50,000
- Risk per trade: 1% = $500
- Entry price: $100
- Stop loss: $95
- Risk per share: $5
- Position size: $500 / $5 = 100 shares
If you're stopped out, you lose $500 - exactly 1% of your account. Not 5%, not 10%. One percent.
Why 1-2%?
It's not arbitrary. It's survival math.
At 1% risk per trade, you can lose 10 trades in a row and still have 90% of your capital. That's a bad streak, but you're still in the game.
At 5% risk per trade, 10 losses leaves you with only 60% of your capital. You need a 67% gain to recover.
At 10% risk per trade, 10 losses leaves you with 35% of your capital. You need a 186% gain to recover.
The math gets brutal fast. Small risks compound into survivability. Large risks compound into ruin.
The Kelly Criterion (And Why You Shouldn't Use Full Kelly)
The Kelly Criterion is a formula for optimal bet sizing based on your edge:
Kelly % = (Win Rate x Average Win - Loss Rate x Average Loss) / Average Win
In theory, this maximizes long-term growth. In practice, it's dangerous for traders because:
- It assumes you know your exact win rate (you don't)
- It assumes each trade is independent (they're not)
- Full Kelly produces massive drawdowns
If you use Kelly at all, use "half Kelly" or "quarter Kelly" - take the formula's output and divide by 2-4. This sacrifices some theoretical growth for dramatically smoother equity curves.
The Anti-Martingale Principle
Martingale betting doubles down after losses. It's how casinos extract money from gamblers.
Smart trading does the opposite: anti-martingale. Risk more when you're winning, less when you're losing.
With fixed percentage sizing, this happens automatically. If you risk 1% of $50,000, that's $500. After winning and growing to $55,000, 1% is now $550. After losing down to $45,000, 1% is only $450.
You naturally scale up when your edge is working and scale down when it's not. No emotional decisions required.
When to Adjust Size
Fixed percentage handles most situations, but consider sizing down when:
- Correlation: Multiple positions in the same sector or correlated assets. If tech dumps and you're in 5 tech stocks, you have one big position, not five separate ones.
- Volatility spikes: When VIX is elevated or your stock gaps wildly, stops may not fill at your price. Reduce size to account for slippage risk.
- Uncertainty: Earnings, Fed meetings, elections. Known events with unknown outcomes. Either skip these or size down significantly.
- Drawdowns: Some traders reduce risk during drawdowns (say, half size after 10% drawdown). This can help stop bleeding but may also reduce recovery speed.
The Bottom Line
Position sizing is the difference between a bad trade being a lesson and a bad trade being a disaster.
The rules are simple:
- Risk 1-2% per trade maximum
- Calculate size from your stop, not the other way around
- Let the math scale your exposure automatically
- Size down in correlated positions or uncertain environments
You can recover from being wrong. You cannot recover from being broke. Size accordingly.
Quality scoring systems can inform sizing decisions further. A setup with strong confluence - cycle phase alignment, volume confirmation, multiple indicators agreeing - might warrant full position size. A marginal setup with conflicting signals might warrant half size or a pass. Data-driven sizing removes emotion from the equation.
Augury Grid's 5-point scoring system rates setup quality based on cycle phase, HTF alignment, and volume confirmation. Pentarch shows whether you're early in a cycle (size normally) or late in exhaustion (preserve capital). Position sizing becomes systematic instead of emotional.
See the quality scores →