Accounts for 90% of performance variation among professional traders
Trade allocation determines outcomes
Most traders focus on entries.
Professionals focus on size.
Position sizing explains 90% of performance variation among traders.
(Research: Dr. Van Tharp — Position Sizing: The Key to Trading Success)
The edge is not just what you trade — but how much.
Why Size Matters More than Accuracy
Two traders.
Same entries.
Same exits.
Same strategy.
The only difference?
How much they risk.
One compounds steadily.
The other blows up after a losing streak.
This is the math of survival vs. destruction.
Academic experiments confirm the pattern:
| Study | Finding |
|---|---|
| Uppsala University (52 traders) | Bankrupt traders risked 22.9% per trade; survivors risked 6.6% |
| Haghani & Dewey experiment (61 finance students) | 28% went broke despite knowing optimal sizing |
| Terry Odean analysis (10,000 accounts) | Overactive + oversized traders underperform consistently |
The lesson is simple:
Over-sizing is lethal — even when the strategy is right.
The Professional Framework for Size
There are three useful approaches:
1️⃣ Risk-based sizing (Primary tool for most traders)
2️⃣ Volatility adjustment (protects against high-variance moves)
3️⃣ Portfolio heat (controls total exposure across positions)
Risk-based formula:
Max Position Size = (Account × Risk%) ÷ Stop Distance
Example:
- $50,000 account
- Risk = 1% → $500
- Stop = $5 per share risk
→ 5 = 100 shares max
The method scales logically:
| Account | 1% Risk | What it Enables |
|---|---|---|
| $5,000 | $50 | Small positioning |
| $10,000 | $100 | Meaningful scaling |
| $50,000 | $500 | Professional size control |
Confidence never determines size.
Risk math does.
Volatility Adjustment
Volatility expansion increases account risk without changing position size.
Simple rule:
When ATR is above average → size down proportionally
When ATR is compressed → standard size
If ATR is 50% higher than normal:
→ reduce position by 33–50%
If volatility doubles:
→ cut position by 50%
Volatility kills faster than drawdowns show.
Portfolio Heat — Your Real Risk
Individual trades do not destroy accounts.
Correlation does.
Portfolio Heat = Sum of all open position risks
Guidelines:
| Profile | Max Heat |
|---|---|
| Conservative | 10% |
| Moderate | 15% |
| Aggressive (experienced only) | 20–25% |
If heat is maxed:
no new trades — regardless of conviction.
This is where most traders fail.
Execution Rules that Prevent Ruin
A proven operating system:
1️⃣ Baseline risk: 1–2% per trade
2️⃣ Paul Tudor Jones Rule: After 3 losses → cut size in half
3️⃣ Drawdown response:
-10% equity: size −25%
-20% equity: size −50%
-30% equity: stop trading and reassess
Trade your smallest when trading worst.
Discipline beats impulse.
Rare Exceptions — When Exposure Can Increase
Soros 1992.
Buffett 1966.
Extreme sizing only applies when:
- Independent edges stack
- Payoff is asymmetric
- Risk is defined and capped
- Information quality is proven
These situations appear maybe twice in a career.
Patience is the edge that sees them.
Action Implementation
Start with:
1️⃣ Define your maximum dollars at risk
2️⃣ Track 20–50 trades with:
- Conviction rating vs. R-multiple outcome
- Volatility at entry
- Heat at entry
3️⃣ Calibrate position sizing only after evidence
Sustainable growth is statistical, not emotional.
Visual Breakdown — Video Edition
These lessons are part of my ongoing public research on
Risk1Reward3.
Position Sizing — The 90% That Actually Matters
How sizing drives real performance outcomes.
→ Watch more: Risk1Reward3 YouTube Channel
See also: Risk Management