Welcome to VRD Nation. Through this channel, we are trying to educate our fellow investors and traders on practically every topic that pertains to the stock market, whether it is investing or trading and we are doing this using a lot of real life examples, real life case studies, real life trades, and a lot of animations because we want to make sure that even an absolute beginner can easily understand these topics and benefit from them.

So if you are new to the stock market, or if you’re new to this channel,do not forget to subscribe. Having said that, let’s talk about today’s topic. If somebody asks me, what is the one topic that you would like every trader to learn? I would say that would be position sizing because position sizing is arguably the most important topic that you will learn and master in your stock market journey and in this video, I will introduce you to the concept of position sizing using real-life examples.

Let us get started. Imagine that you are an army general and you have five battalions at your disposal. Now, if you have to send your troops to battle, will you send all these five battalions all at once? No, of course not, because it’ll be a strategic blunder. If the enemy happens to be stronger than you anticipated, your whole army would get destroyed.

Hence, any good army general will, first of all, assess the risk involved in any situation and deploy the troops based on that risk assessment. If the risk is higher, he would be cautious and he would deploy maybe just a single battalion and if the risk is lower, maybe he can deploy two or even three battalions.

The point that I’m trying to make here is that the conservation of the army is the number one priority of any general, because, without the army, the general is nothing. In the same way, professional traders treat their capital as their army and the conservation of their capital is their number one priority because without the capital, traders are nothing.

Just like an army general, every professional trader divides this capital into battalions in order to deploy them strategically and this strategic deployment of capital to any trade or set of trades is called position sizing. Now the golden rule of position sizing is that position size in any trade should be inversely proportional to the risk involved, meaning that if the risk is higher, the position size has to be lower. On the other hand, if the risk is lower, the position size can be higher.

For example, a trader has 10 lakhs of capital and she spots a trading opportunity, but given the parameters of the trade, she thinks that the trade is risky.

So by following the golden rule of position sizing, she will bring down her position size. She does not want to risk her whole capital and will probably deploy one third or one fourth of her capital in this trade. That is a general concept of position sizing where you break down your capital into parts and deploy them strategically based on the risk involved in any trade.

Now, let me just give you a real life example to demonstrate the concept of what sizing is. So guys today’s Thursday, and, as many of you might be aware, I do expiry trading on Thursdays. In case you don’t, we have made a series of videos about this topic, so you might wanna check them out. When I started the day, I was planning to deploy about 90 lakhs to 1 crore rupees, with the expectation to make 1% return.

My view of the market was a little bullish and I was expecting the market to go up, but that does not mean that I would put all my capital in just one trade and hope and pray for the trade to work out. In case the trade did not work out and the market started to go down, then I could have incurred 2%, 3% or even more losses.

Therefore, the key to win this game is position sizing. You break down your capital and then you deploy them on those trades where you see a higher probability of the trade working out and you always make sure that you have enough capital to defend your position. Now throughout the day, this is something which I did like a screen recording, and you can see how the P&L fluctuated throughout the day.

Some of the trades that I took did not work out and some of the trades did work out, but working on one trade is not important here. What is important is that as an overall portfolio, as a whole army, are you succeeding or not? That is exactly what I did here. Of course there are fluctuations throughout the day, but eventually if your strategy is right, and if you size your positions based on the risk, which in the case of option is very much related to the strike price that you’re selling, then it was just a matter of time that the trade eventually became profitable.

So guys, that was a core concept of position sizing and the topic is of course, very wide. There are a lot of aspects to position sizing, but I just wanted to keep this topic short so that beginners can get introduced to this topic. If you want to learn more about position sizing, we actually made another awesome video on this topic.

Hence, I would strongly recommend you to watch that as well. As of now, I hope that watching this video, you got the sense of what position sizing is all about.