What it is
Position sizing decides how much capital a given trade controls. Together with the exit it determines almost everything about the shape of an equity curve: two traders taking identical signals with different sizing rules end up with entirely different outcomes, and the sizing rule usually matters more than the entry that generated the trade.
How it works
The most common framework is fixed-fractional risk. Choose a fraction of account equity to put at risk, typically between a quarter of a percent and one percent per idea, then divide that amount by the per-unit distance between entry and stop to get the quantity. Volatility targeting is the systematic cousin: size inversely to ATR or to realised volatility so that every position contributes a similar amount of expected variance to the portfolio regardless of how jumpy the instrument is.
How traders use it
Whatever the formula, it has to survive contact with reality. Round down to tradeable lots or contracts, include commissions and expected slippage in the risk figure, respect margin and notional limits, and cap total exposure across correlated positions. Ten trades sized at one percent each in the same sector is one trade at ten percent wearing a disguise, and portfolio risk is what actually ends accounts.
Where it breaks down
Every sizing rule based on a stop assumes the stop will be filled near its price. Gaps, halts, limit moves and weekend risk break that assumption, so a realised loss can exceed the planned one by a wide margin, which is the argument for keeping per-trade risk small enough that a bad fill is survivable. Sizing off a backtested win rate that was optimised on the same data is the other reliable way to end up over-leveraged without knowing it.
Educational reference. This entry describes how a concept is defined and used. It is not investment advice, not a recommendation, and not a signal. Any rule you build from it should be tested with realistic costs before it is traded, and no historical result guarantees a future one.