Pretrade quantity filters that bound account risk

Quantity is chosen before the order

Quantity is a decision that must be set before a position is opened, not chosen while the order is being sent. Position size is the quantity opened on a name, chosen from account equity, a cash unit, or that name's variability rather than from the size of an imagined gain.

If a holding can fall to zero, the cash committed to that holding is the maximum capital that can be lost on it, aside from commissions and fees. Using the entire account on one name, such as 100 shares of a $100 stock in a $10,000 account, places 100 percent of that account at risk. A large allocation to one name also creates opportunity cost by leaving less capital available for other trades.

A concentration limit keeps one name from consuming the book

A concentration limit is a hard ceiling on how much of the account one holding may occupy so a single name cannot consume the book. A preset share of account equity per trade, illustrated at 1 percent and mentioned as high as 10 percent, acts as that ceiling.

On a $10,000 account and a $100 name, a 1 percent allocation is one share. That is a 1 percent commitment rather than a full-account commitment.

A fixed cash unit bounds outlay

A fixed cash unit is a preset dollar outlay used as the size of each new trade, independent of a percentage of equity. A fixed cash ceiling per trade, illustrated as $200 on a $10,000 account, bounds outlay but can exclude names whose price exceeds that ceiling.

Volatility position sizing keeps jumpy names from dominating

Volatility position sizing reduces quantity in names that move more and increases it in quieter names so jumpy holdings do not dominate the book. Fewer shares are bought of more volatile names and more shares of quieter names so higher-volatility holdings do not dominate portfolio movement. A standard deviation measured over about 10 or 15 trading sessions is given as a simple input for that volatility adjustment.

Averaging down still needs a bound

Averaging down is adding to a holding after price has fallen, still under a predetermined size rule rather than an open-ended add. Adding to a declining holding can reuse a fixed-dollar, percentage-of-decline, or volatility rule, but still needs a bound so the position is not scaled all the way to zero.