Risk Based Position Sizing

Balanced Risk - the Key to a 97% Win Rate

Risk-based position sizing is a strategy where the size of a trade is determined based on the amount of capital you're willing to risk on that trade, rather than a fixed number of shares or a percentage of your portfolio. It aligns your position size with your risk tolerance and the specific trade's stop-loss distance.

Here's how it works:

1. Define Risk Per Trade: Decide the percentage of your total capital you're willing to lose on a single trade (e.g., 1% of a $10,000 account = $100).

2. Set Stop-Loss: Determine the price level where you'll exit the trade if it goes against you (e.g., buying a stock at $50 with a stop-loss at $48, meaning a $2 risk per share).

3. Calculate Position Size: Divide the risk per trade by the risk per share to find the number of shares to buy. Using the example: $100 ÷ $2 = 50 shares. You will lose exactly $100 if the stop is triggered.

4. Adjust for Account Size and Volatility: Factor in your total capital and the asset’s volatility. For volatile assets, you might reduce position size to limit risk.

Formula:
Position Size = (Account Size × Risk Percentage) ÷ (Entry Price - Stop-Loss Price)

Example:

• Account: $10,000;

• Risk per trade: 1% ($100);

• Stock entry: $50, stop-loss: $48 (risk $2/share);

• Position size: $100 ÷ $2 = 50 shares ($2,500 position).

Benefits:

• Limits losses to a predefined amount;

• Adapts to different trade setups and market conditions;

• Helps manage risk consistently across trades.

Considerations:

• Requires accurate stop-loss placement;

• Must account for transaction costs and slippage;

• Works best in combination with Barky’s Diagonal Entry Model.