Position sizing is the process of determining how much capital to allocate to individual trades or investments based on risk tolerance, market conditions, and portfolio objectives. Proper position sizing helps manage risk, optimize returns, and prevent catastrophic losses from individual positions. This is one of the most critical aspects of successful trading and investing.

Position sizing methods include fixed percentage of capital, volatility-based sizing, and Kelly Criterion calculations. Factors affecting position sizing include market volatility, correlation with existing positions, conviction level, and stop-loss distances. Understanding position sizing helps optimize risk-adjusted returns and portfolio performance.

Real-world example: A trader with $100,000 capital uses 2% risk per trade, sizing a EUR/USD position to risk $2,000 maximum loss based on stop-loss distance, resulting in a position size of 200,000 EUR if the stop is 100 pips away.