Trade sizing

Trade sizing

In order to manage risk, maximise profits, and accomplish long-term trading goals, it is essential to master the skill of allocating the right amount of money to a transaction. Successful trading requires careful consideration of trade sizing. It is frequently overlooked, despite the fact that it may build or destroy a trader’s career, while many traders concentrate on entry and exit tactics. 

What is trade sizing? 

Determining the amount of capital to invest in a single trade is known as trade size. It’s not a one-size-fits-all strategy; rather, it calls for careful thought and modification based on a number of aspects. These variables include the trader’s risk tolerance, market circumstances, account size, as well as a specific trading approach. 

Understanding trade sizing 

The right trade size aids investors and traders in managing possible losses and maximising gains. Risk tolerance, account size, anticipated volatility, and the particular trading method being used are all variables that affect trade sizing. Individuals may achieve a balance between profit potential and capital preservation by properly sizing deals, ensuring that no one trade has an unfavourable effect on their whole portfolio. Maintaining financial security and long-term trading success depend on this practice. 

Trading professionals may better manage risk, retain emotional control, and increase their prospects of long-term success in financial markets by implementing strong risk management concepts and sticking to well-defined trade size techniques. Always keep in mind that your ability to conserve and develop your trading money over time is more important than simply how much you may profit from a single deal. 

Working of trade sizing 

In simple words, here’s how trade sizing works: 

  • Determining risk tolerance 

Traders must first assess their level of risk tolerance. Knowing how much of their cash they are prepared to risk on a single deal is essential for this. Risk tolerance varies from person to person and is influenced by things like experience, financial objectives, and psychological fortitude. 

  • Determine position size 

Traders utilise their defined risk tolerance to determine the position size for a transaction. This entails figuring out how much money will be at stake in the deal, often expressed as a percentage of the entire trading capital. 

  • Create stop-loss orders 

For every trade, traders need to specify a stop-loss order. The stop-loss is a pre-set price level below which the deal will be closed off in order to prevent further losses. The separation between the entry point and the stop-loss level influences the position size. 

  • Risk/reward ratio 

Traders weigh the risk vs the potential profit. They seek a favourable risk-reward ratio in which the possibility of profit outweighs the possibility of loss. 

  • Execute the trade 

The trader completes the transaction having established the position size and risk criteria. This entails entering the market at a particular price, and the size of the position guarantees that the calculated risk remains intact. 

Importance of trade sizing 

Trade size is crucial in both trading and investing. Risk management, long-term viability and profitability are all directly influenced. Effective trade sizing benefits traders in different ways. 

  • Risk management reduces the chances of major losses by ensuring that no single deal poses a significant danger to a trader’s capital. 
  • Proper trade size lessens the emotional stress related to trading since it limits losses and discourages overtrading. 
  • Traders that keep their trade sizes constant might create a better organised and long-lasting trading approach. 
  • Profits may be maximised by traders using smart capital allocation techniques when pricing trades. 

Examples of trade sizing 

For instance, if a trader wishes to purchase shares of a stock with a 5% maximum risk per transaction and has a US$100,000 portfolio, they might allocate US$5,000 (US$100,000 * 0.05) to that trade. This would be equivalent to buying 100 shares of the stock at US$50 a share. The right trade size guarantees that any losses are controllable and complement the investor’s entire risk management plan. 


Frequently Asked Questions

You must take into account your risk tolerance, account balance, and the particulars of the trade when determining trade size. Utilising a portion of your whole account balance is a frequent strategy.  

Here is an easy formula: trade size = stop loss in pips / (account balance * risk percentage). 

Calculating the right amount of capital to allocate to each transaction or investment is known as capital sizing in trading. It is an essential risk management technique that aids traders and investors in safeguarding their investments. Setting a maximum proportion of total money that can be staked on a single deal aims to minimise excessive losses and maximise rewards.  

The risk tolerance of the trader, the volatility of the asset, and the diversification of the entire portfolio all influence this proportion, also known as position size. The markets are more likely to be sustainable over the long run when capital is appropriately sized to guarantee that no single deal has the potential to have a substantial influence on the trader’s overall financial health. 

As it directly affects risk and possible profits, trade size is important in both investing and trading. A larger trade size suggests more exposure to market volatility, which might result in both larger gains and losses.  

Smaller trade sizes, on the other hand, lower risk but may restrict possible gains. Your risk tolerance, financial objectives, and portfolio diversification should influence your trade size selections.  

Effective trade size management allows you to protect money, follow your risk management plan, and strike a balance between the likelihood of profit and the likelihood of loss, assisting you in maintaining a profitable and long-lasting trading or investing strategy. 

A risk management principle known as the “3-5-7” rule in trading advises diversifying one’s financial holdings to reduce risk.  

  • 3% rule 

The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal. In order to safeguard themselves against big losses, traders attempt to restrict exposures on a single deal. 

  • 5% rule 

According to the second element, you shouldn’t put more than 5% of your total trading capital at risk in the market at any given moment. This takes into consideration numerous holdings and helps avoid very high market or asset concentration. 

  • 7% rule 

The final part states that your portfolio’s overall maximum loss should be at most 7% of your trading capital. This regulation emphasises the significance of placing stop-loss orders to reduce possible losses. 

To trade using position size, you must first choose how much capital (usually a percentage of your entire capital) you are willing to bet on a single deal. The position size is then determined by dividing this risk value by the difference between your entry price and stop-loss level. By preventing you from overcommitting to any one deal, this method helps you control risk and enables more consistent risk management throughout your trading portfolio. 

    Read the Latest Market Journal

    Back in Business: The Return of IPOs & Top Traded Counters in March 2024

    Published on Apr 17, 2024 115 

    Start trading on POEMS! Open a free account here! At a glance: Major indices continue...

    Weekly Updates 15/4/24 – 19/4/24

    Published on Apr 15, 2024 41 

    This weekly update is designed to help you stay informed and relate economic and company...

    From $50 to $100: Unveiling the Impact of Inflation

    Published on Apr 12, 2024 126 

    In recent years, inflation has become a hot topic, evoking strong emotions as the cost...

    Japan’s Economic Resurgence: Unveiling the Tailwinds Behind Nikkei 225’s Record Leap

    Published on Apr 11, 2024 76 

    Source: eSignal, Intercontinental Exchange, Inc. In the heart of Japan’s economic landscape, the Nikkei 225...

    Weekly Updates 8/4/24 – 12/4/24

    Published on Apr 8, 2024 106 

      This weekly update is designed to help you stay informed and relate economic and...

    What Makes Forex Trading Attractive?

    Published on Apr 2, 2024 187 

    In a world where the click of a button can send goods across oceans and...

    Weekly Updates 1/4/24 – 5/4/24

    Published on Apr 1, 2024 97 

    This weekly update is designed to help you stay informed and relate economic and company...

    How to soar higher with Positive Carry!

    Published on Mar 28, 2024 135 

    As US Fed interest rates are predicted to rise 6 times this year, it’s best...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you


    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  


    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066