One common reason why traders blow up is because of poor position sizing. In other words, how much do you bet on a trade.

You can be right on direction 60% of the time and still lose everything if you size your positions poorly. One oversized trade can wipe out months of gains. This is why position sizing is a big part of risk management.

Sandeep Rao recently spoke to Tom Basso, one of the original Market Wizards, to discuss his approach to trading. I was listening to the interview and the one thing that stood out to me was how Tom's thinking on position sizing evolved over decades.

He started simple: risk the same percentage of equity on every trade, inspired by Larry Hite's philosophy that every bet should be equal in terms of potential loss.

But then came a silver trade with explosive volatility. Clients were calling, nervous about the wild swings. So he realized it wasn't just about the amount you could lose—it was also about the speed of movement. High volatility creates psychological stress that leads to poor decisions.

So he added a second layer: volatility as a percentage of equity. Now he'd calculate both risk % and volatility %, then take the smaller of the two.

Then came the third refinement: margin-to-equity ratios. Some markets have deceptively low risk and volatility but require high margin because of sudden jump risk. By incorporating all three factors, he never got caught overexposed.

The result was a position sizing system that automatically scales down when markets get too volatile, protects against margin squeezes, and keeps portfolio risk in check. It's really interesting conversation.

Watch the full interview: youtube.com/watch?v=lej…

I'd also recommend reading the Zerodha Varsity module on position sizing: zerodha.com/varsity/cha…