Understanding Position Sizing: It's Not Just About Leverage

Too often, new traders hear "position sizing" and immediately think leverage, or how much capital they're deploying into a single trade. While leverage is certainly a component, it's a downstream consideration. The core of position sizing, in my view, is managing your risk per trade.

Let's say you've done your analysis, identified your entry, and crucially, determined your stop-loss level. The difference between your entry and your stop is your risk per share/unit. If you're buying $PLTR at 172.01 and plan to bail if it drops below 160.00, your per-share risk is roughly $12.01. If your overall account risk tolerance is, for example, 1% of your capital, and your account is $100,000, you're looking to risk $1,000 on this trade. Simple division tells you that you can take on approximately 83 shares ($1,000 / $12.01 per share). This approach dictates how many shares you buy, not the other way around. It ensures that even if you're wrong on this particular $PLTR trade, it's a manageable hit to your capital, not a crippling one. It's a fundamental principle often overlooked for the flashier aspects of trading.