You could have the best strategy on the planet, but if position sizing is wrong, you'll blow up your account. Position sizing answers: 'How much of my capital goes on this trade?' Most beginners either bet way too much (risking 20-50% on one idea) or spread too thin. The professional rule: risk no more than 1-2% of your total account on any single trade. On a $10,000 account, max loss per trade is $100-$200. Sounds small, but it's how you survive losing streaks — and every trader will face them.

The Kelly Criterion is a mathematical formula for optimal bet sizing based on your edge. Originally developed for gambling, it was adapted by legendary investors like Ed Thorp. The formula: Kelly % = W - (L / R), where W is win probability, L is loss probability, and R is win/loss ratio. If you win 55% of the time and average wins are 1.5x average losses, Kelly says bet about 22%. But most practitioners use half-Kelly or quarter-Kelly because full Kelly is extremely aggressive.

In practice: $50,000 account, 1% risk per trade = $500 max loss. If your stop loss is $2 from entry, you buy 250 shares. If stop is $5 away, you buy 100 shares. The position size adapts to the setup. This is volatility-adjusted position sizing — wider stops don't mean more risk, you just take fewer shares. Every trade has the same dollar risk regardless of stock price or stop distance. This consistency keeps you in the game long-term.

The psychological benefit might be even more important than the math. When max loss is 1%, you take losses without emotional damage. You don't panic-sell because the loss is manageable. You don't revenge-trade because one loss doesn't trigger desperation. Compare that to someone risking 10% per trade — three losses and they've lost 30%, psychology destroyed, irrational decisions follow. Position sizing is the unsexy foundation that makes everything else work.