The position limit option helps prevent your model from becoming overconcentrated in a single security.
This section really only comes into play if you include overlays or other rules that could result in your model failing to reach its target number of holdings.
Let's look at a scenario where a model is set to own 5 funds and also has an overlay that states all funds need to have a fund score of 3 or higher.
In this case, only 3 of the stocks in the top 5 meet the overlay condition.
If the position limit is kept at the default value of 100%, the model will simply spread the allocation out among the 3 funds that meet the overlay condition, and as a result, each will have a target weighting of 33.33%.
If the position limit was instead set to 25%, 75% of the portfolio would be allocated to those 3 funds (25% x 3) and the remaining 25% would be allocated to MNYMKT (or whatever security you enter in its place).