The Importance of Position Sizing in Risk Management

I see many people often overlook Position Sizing, but in reality, this is the heart of risk management. No matter how good you are at analysis, if you miscalculate your position size, you can easily fail. Suppose you have an account of 10,000 $ and set a maximum risk of 1% per trade. That means you are only willing to lose 100 $ per trade. Now, if you enter a trade on $VNM at 17.16 and have a Stop Loss at 17.06 (meaning a loss of 0.10 $ per share), you should not enter more than 1,000 shares (100 $/0.10 $).

This type of calculation helps you control your loss per trade within an acceptable range, rather than risking your entire capital on $NATGAS or $CORN just because you think it's good. This method doesn't guarantee you'll be right, but it helps you stay in the game longer, even if you encounter a drawdown period.