Position sizing
The amount put on one idea, set from the loss accepted if you are wrong.
Deciding the loss before the gain
Position sizing sets the amount committed to an idea. The most common method starts from risk: you decide the share of capital you accept to lose if the scenario fails (often 0.5 to 2%), place a stop where the idea is proven wrong, and the quantity follows from the distance between entry and stop.
Quantité = capital × risque % / (entrée - stop)
Worked example
€20,000 at 1% risk
- Accepted risk: €200.
- Entry at €50, stop at €46: €4 per share.
- Quantity: 200 / 4 = 50 shares, €2,500 invested.
The position is 12.5% of the account but risks only 1%.
Questions and answers
What about the Kelly criterion?
It computes the optimal fraction to stake from the win probability and the gain-to-loss ratio. In practice people often use a fraction of it (half or a quarter), because probabilities are estimated with error.
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