For those holding for the result/s, I thought this explanation from Microsoft CoPilot AI might be useful.
I've learnt the hard way that its ultimately on me how much I lose on a trade.
You: what is position sizing in stock-market trading ?
Copilot: Position sizing in stock market trading refers to the process of determining how many shares of a particular stock or contracts of an option an investor or trader should buy. It’s a crucial aspect of risk management that helps control potential losses and maximize returns. Here are the key points about position sizing:
Definition: Position sizing refers to the size of a position within an investor’s portfolio, specifically the dollar amount they plan to invest in a particular security.
Risk Considerations: When determining appropriate position sizing, an investor must take into account their risk tolerance and the size of their trading account. This ensures that they don’t expose themselves to excessive risk.
Application:Stock Trading: In stock trading, position sizing involves deciding how many shares of a stock to buy. For example, if an investor has a $25,000 account and wants to risk no more than 2% of their capital on any one trade, they would limit their risk to $500 per trade.Options Trading: For options, position sizing is based on the number of contracts purchased. The price of the security and its volatility also play a role in determining the capital invested.
Calculating Position Size:Account Risk: Determine the maximum amount of capital you’re willing to risk on a trade (e.g., 2% of your account).
Trade Risk: Decide where to place your stop-loss order. If trading stocks, this is the distance (in dollars) between your entry price and the stop-loss price.
Proper Position Size: Divide the account risk by the trade risk to find the correct position size. For example, if your account risk is $500 and your trade risk is $20 per share, you can buy 25 shares ($500 / $20).
Gap Risk: Even with correct position sizing, there’s a risk that a stock may gap below your stop-loss order, resulting in a larger loss than anticipated.
Remember, position sizing is a critical component of successful trading, helping you manage risk effectively and optimize your investment strategy
(20min delay)