## Introduction

*trading system*. The purpose of this system is to manage risk, but equally importantly, to help eliminate unnecessary decisions. This way, when the time comes, your trading system wonโt allow you to make hasty and impulsive decisions.

When youโre establishing these systems, youโll need to consider a few things. Whatโs your investment horizon? Whatโs your risk tolerance? How much capital can you risk? We could think of many others, but in this article, weโll focus on one specific aspect โ how to size your positions for individual trades.

To do that, first, weโll need to determine how big your trading account is, and how much of it youโre willing to risk on a single trade.

## How to determine account size

*available capital*that you can allocate to a particular trading strategy.

## How to determine account risk

The second step is determining your account risk. This involves deciding what percentage of your available capital youโre willing to risk on a single trade.ย

### The 2% rule

**1% rule**instead.

## How to determine trade riskย

So far, weโve determined our account size and account risk. So, how do we determine the position sizing for a single trade?

**where our trade idea is invalidated**.

*โour initial idea was wrong, and we should get out of this position to mitigate further lossesโ*. On a more practical level, this just means where we place our stop-loss order.

There isnโt a one-size-fits-all approach to determining your stop-loss. Youโll have to decide for yourself what strategy suits your style the best and determine the invalidation point based on that.

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## How to calculate position size

So, now, we have all the ingredients we need to calculate position size. Letโs say we have a $5000 account. Weโve established that weโre not risking more than 1% on a single trade. This means that we canโt lose more than $50 on a single trade.

Letโs say weโve done our analysis of the market and have determined that our trade idea is invalidated 5% from our initial entry. In effect, when the market goes against us by 5%, we exit the trade and take the $50 loss. In other words, 5% of our position should be 1% of our account.ย

**Account size**โ $5000**Account risk**โ 1%**Invalidation point**(distance to stop-loss) โ 5%

The formula to calculate position size is as follows:

`position size = account size x account risk / invalidation point`

`position size = $5000 x 0.01 / 0.05`

`$1000 = $5000 x 0.01 / 0.05`

To illustrate how this works, letโs increase our invalidation point to 10%, with everything else being the same.ย

`position size = $5000 x 0.01 / 0.1`

`$500 = $5000 x 0.01 / 0.1`

## Closing thoughts

**before**entering a trade.

An equally important aspect of this strategy is execution. Once youโve determined the position size and the invalidation point, you shouldnโt overwrite them once the trade is live.