The process of determining how many contracts, lots, or shares to trade on a given position based on account size, risk tolerance, and the distance to the stop-loss. Proper position sizing ensures no single trade can cause catastrophic losses.
Why It Matters
- 1Position sizing is arguably the most important risk management skill in prop trading.
- 2Even a great strategy will fail if you size positions too large and hit drawdown limits.
- 3In a prop firm context, you must size positions relative to both the daily loss limit and max drawdown — not just your account balance.
- 4A common rule is to risk no more than 1-2% of your account on any single trade, which leaves room for a string of losses without breaching rules.
Example
You have a $100,000 account with a 4% daily loss limit ($4,000). You want to risk no more than 1% per trade ($1,000). Trading NQ futures with a 20-point stop-loss ($20/point × 20 points = $400 risk per contract), you can trade a maximum of $1,000 ÷ $400 = 2.5, rounded down to 2 contracts.
Common Mistakes
- ✖Using the same position size regardless of stop-loss distance, leading to inconsistent risk per trade
- ✖Sizing positions based on account balance without considering drawdown limits
- ✖Increasing position size after losses to 'make back' what was lost (revenge trading)