ViLiQ

Position sizing: the decision that matters most

Risk management · lesson 1

24 minute read55 VILIQ Points

By the end
Size a position from a defined risk budget rather than from conviction.

  • Risk +16

Most attention goes to what to buy. Position size determines far more of the outcome. A brilliant idea at 2% of a portfolio and a mediocre idea at 40% will produce results dominated by the second, regardless of which analysis was better.

Sizing from a risk budget

position size = (portfolio × risk per trade) / distance to invalidation

Decide what fraction of the portfolio you are prepared to lose on this idea, and where the idea is proven wrong. The size follows arithmetically. Conviction does not appear anywhere in the formula, which is the point.

Example — Working it through

A A$100,000 portfolio with a 1% risk budget means A$1,000 at risk. If the thesis is invalidated by a 20% adverse move, the position is A$1,000 / 0.20 = A$5,000, or 5% of the portfolio. If the invalidation is 40% away, the same risk budget supports only A$2,500.

Common belief

"I am very confident, so I should size up."

What is actually true

Confidence is not calibrated for most people, and it is highest immediately before the errors that matter. Sizing by conviction means your largest losses arrive on the positions you were most certain about — which is exactly the pattern most people report.

This is why the VILIQ paper trading coach grades position sizing separately from profit. A member who made money with 90% of the account in one position gets a poor sizing grade, because the process was poor and the outcome was luck.

Glossary

Risk budget
The fraction of a portfolio you are prepared to lose on a single idea.
Invalidation
The point at which the reasoning behind a position is proven wrong.
Concentration
How much of an outcome depends on a single position.

Check your understanding

0 of 3 answered

Pass mark 70%: at least 3 of 3 correct.

  1. 1.A A$50,000 portfolio, 2% risk budget, invalidation 25% away. What is the position size?
  2. 2.An asset requires a wider invalidation distance. What happens to position size?
  3. 3.Why is conviction a poor input to position size?

Challenge — Size three positions

With a A$100,000 portfolio and a 1.5% risk budget per idea, size three positions whose invalidation distances are 12%, 25% and 45%. Give each as a dollar amount and a portfolio percentage, then state total exposure and what happens if all three hit their invalidation.

What a good answer contains

  • Applies the formula correctly to all three
  • Expresses each as both a dollar amount and a percentage
  • Computes the combined loss if all three fail and comments on whether that is acceptable

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Put it to work

Read a market with what you just learned, then practise with simulated money. No real order is ever placed.

VILIQ provides market intelligence, research and educational information. It is not financial product advice and does not take your personal circumstances into account. Consider your own situation and seek licensed advice before making financial decisions.

VILIQ provides market intelligence, research and educational information. It is not financial product advice and does not take your personal circumstances into account. Consider your own situation and seek licensed advice before making financial decisions.

VILIQ is operated by LTM Trading Pty Limited (ACN 659 211 426), Australia.