Position sizing fundamentals
Size from acceptable loss, not from confidence.
Position sizing fundamentals
A common risk-based approach begins with the amount of portfolio capital that may be lost if the thesis is invalidated.
| Concept | Explanation | |---|---| | Portfolio value | Total capital used as the sizing base. | | Risk budget | Maximum acceptable loss on the position. | | Entry price | Expected purchase or execution price. | | Invalidation price | Level at which the thesis is no longer supported. | | Risk per unit | Entry price minus invalidation price for a long position. | | Position size | Risk budget divided by risk per unit. |
Key idea: Higher conviction should never replace explicit sizing. Confidence can be wrong; risk budget is controllable.