Position Sizing

Position sizing is the process of deciding how much capital — how many shares or lots — to commit to a single trade, so that a normal losing streak cannot do abnormal damage to the account. Entry signals get the attention, but sizing is what determines whether a strategy’s inevitable drawdowns are survivable. The most common systematic method is fixed-fractional: risk a fixed percentage of account equity per trade, typically 0.5–2%.

Formula

Quantity = (Account equity × risk per trade %) ÷ risk per unit

Hypothetical example: account ₹6,00,000, risk 1% per trade (₹6,000). A stock trade has entry ₹520 and stop ₹508, so risk per share = ₹12.

Quantity = 6,000 ÷ 12 = 500 shares

In F&O the lot size makes sizing chunky: if a NIFTY futures trade risks 60 points, one lot of 75 risks ₹4,500 — within the ₹6,000 budget — but two lots (₹9,000) breach it, so the system trades one. When even one lot exceeds the risk budget, the correct size is zero; that discipline is exactly what automation enforces and humans skip.

Why it matters

Sizing links a strategy’s statistics to real capital. The same rules risking 1% versus 5% per trade produce utterly different outcomes: the 5% version turns a routine six-loss streak into a −26% hole and invites margin trouble on leveraged positions. Systematic traders size from the max drawdown distribution, not from optimism.

In INDfolio AI, risk-per-trade rules are part of the strategy definition and applied consistently from backtest through paper and live execution.