What does 'position sizing' refer to in trading?

Position sizing refers to the amount of capital that a trader allocates to a single trade, which is crucial for effective risk management. Understanding position sizing helps traders determine how much money should be invested in a trade based on their overall account size and their risk tolerance. This approach ensures that a trader doesn't risk more than a predetermined percentage of their capital on any one trade, which can protect their investment and maintain longevity in the market.

This method enables traders to make informed decisions that align with their risk management strategies. A well-planned position size can help minimize losses in unfavorable market conditions and maximize potential gains when the market moves in their favor. By focusing on position sizing, traders are able to engage in disciplined trading practices that ultimately lead to better long-term financial outcomes.