Master position sizing, stop losses, and portfolio risk management to protect your capital and maximize long-term returns.
Rule #1: Protect capital first, make profits second. You can't compound returns if you lose your capital.
Never risk more than 1-2% of your total capital on a single trade.
Example: $100,000 account × 1% = $1,000 max risk per trade.
If stop loss is 2%, you can invest $50,000 (1% risk = $1,000 loss at 2% stop).
Every position must have a predetermined exit point for losses. No exceptions.
Don't put all capital in one stock or sector. Spread risk across 5-10 positions minimum.
Target at least 1.5:1 reward to risk. If risking 2%, aim for 3%+ gain.
Invest same % of capital per trade (e.g., 10%). Simple but doesn't account for risk.
Size position so you risk fixed % of capital. Accounts for stop loss distance.
Risk = (Entry - Stop) × Shares
Shares = Portfolio × Risk% / (Entry - Stop)
Mathematical formula for optimal sizing based on win rate and payoff ratio. Advanced users only.
Limit concurrent holdings: 5-10 for most traders. Prevents over-diversification and maintains focus.
Max 30-40% in any single sector. Avoids concentration risk (e.g., all tech stocks).
Avoid holding highly correlated stocks. Diversification requires low correlation.
