Position sizing is the practice of determining how much capital to allocate to a given position. It connects the size of a trade to the amount of risk a participant is willing to take, often by relating the distance to an exit point and the portion of capital exposed.
Sizing interacts directly with leverage and volatility: the same dollar position carries very different risk depending on how much leverage is applied and how volatile the asset is. Larger positions amplify both the impact of favorable moves and the impact of adverse ones.
Position sizing is a foundational concept in risk management because it governs how much a single outcome can affect overall capital. It is a framework for thinking about exposure and risk, described here mechanically rather than as a recommendation about how much anyone should allocate.