Position sizing answers the question that decides whether a trading strategy survives: how much of your account do you put at risk on this trade? You do not control where the market goes, but you control how much the account loses if you are wrong. That makes position sizing the only lever in trading that is fully in your hands — and the one beginners almost always skip, sizing trades by how much the position is worth instead of how much it can cost.
Nothing in this guide predicts anything. It is survival arithmetic: pick a fixed percentage of the account to risk per trade, work backwards from your stop-loss to the number of shares, and let the math — not the size of the opportunity — decide the position. Done consistently, it turns "what happens in a bad streak" from a question of luck into a number you chose in advance.
The position sizing formula
The standard formula sizes a position so that if the stop-loss is hit, you lose exactly your risk percentage of the account:
shares = (account size × risk%) / |entry price − stop price|
- Account size — the equity you actually have (not your margin limit)
- Risk % — the share of the account you accept losing if the stop is hit, typically 1–2%
- Entry price — where you plan to buy (long) or sell (short)
- Stop price — the price where the trade's thesis is proven wrong, placed before entry
Four steps in practice:
- Pick your risk percentage. For most traders that is 1%; see the next-but-one section for why.
- Define the entry and the stop from structure or volatility — support/resistance levels, or an ATR multiple — before the order goes in.
- Compute the risk amount: account size × risk%. On a $100,000 account at 1% that is $1,000.
- Divide the risk amount by the per-share stop distance (|entry − stop|) to get the number of shares.
The key mental shift: the stop distance, not the position's market value, is what sizes the trade. A $30,000 position with a $5 stop costs more than a $30,000 position with a $1 stop.
Worked example
Long trade: $100,000 account, 1% risk, entry $150, stop $145, take-profit $160:
- Risk amount = 100,000 × 1% = $1,000
- Per-share stop distance = |150 − 145| = $5
- Shares = 1,000 / 5 = 200 shares
- Position value = 200 × 150 = $30,000 — 30% of the account, which the formula never asked you about
- Risk/reward = (160 − 150) / (150 − 145) = 2:1; if the target is hit the trade returns $2,000
The short version uses the identical formula with the stop on the other side: entry $150, stop $155, target $140. The stop distance is |150 − 155| = $5, so on the same account and risk you again take 200 shares, with a 2:1 reward. The absolute value is what makes one formula cover both directions.
Why risk % beats position value
Watch what happens to the same 200-share position ($30,000) as the stop moves: stop at $145 risks $1,000 (1% of the account); stop at $149.50 risks $100 (0.1%); stop at $135 risks $3,000 (3%). Same position value, thirty-fold different risk. An account only ever feels risk — the position value is just the distance to the stop multiplied by the shares.
This is why "I was only in for 10% of my account" is not a risk statement. Two traders with identical position values can risk 10 times different amounts on the same trade, purely because their stops sit at different distances. Fixed-percentage sizing exists to remove that hidden variable: the worst case per trade is a constant you chose, so a losing streak's damage is known in advance, and the question "can I survive 10 losers in a row?" has a numerical answer instead of a feeling.
How much should you risk per trade
The 1–2% rule exists because losing streaks are a matter of arithmetic, not of how bad a month you are in. If each loss costs exactly 1% of the account, ten consecutive losses cost 0.9910 − 1 ≈ 9.6% of equity. At 2% per trade the same streak costs ≈ 18%. At 5% — a common size for confident beginners — it costs ≈ 40%, which is a drawdown that changes how a person trades.
The streaks themselves are not as rare as they feel. On a coin-flip strategy (50% win rate) the chance of ten consecutive losses at any given point is 1/1024 ≈ 0.1% — small, but a full year of daily trading offers hundreds of windows, and the event lands eventually. On a weak 35%-win-rate system the same ten-losers streak happens ≈ 13% of the time. The practical rule: choose the risk % whose worst realistic streak you can watch without changing your behavior. 1% is the safe default; 2% is defensible for systems with a track record; above that, the math of drawdowns and of your own hands starts to disagree.
Where the stop comes from
The formula's denominator is the stop distance, so the quality of the size is capped by the quality of the stop. The common sources, in increasing order of objectivity:
- Structure — the nearest support (longs) or resistance (shorts) beyond which the trade's logic no longer holds. Clean to look at, easy to place lazily.
- Volatility — a multiple of the Average True Range (1.5–2× ATR is common) sits where normal noise stops and a real move begins. The ATR Stop Loss Calculator and the ATR Calculator on this site produce that distance.
- Fixed percentage — a simple 2–3% below entry. Blunt, but it keeps sizing honest when no structure exists.
One rule matters more than the choice: the stop is set at entry and does not move against you. Widen the stop after entry and you have silently changed the risk from 1% to whatever the new distance implies — the entire guide above just applied to a number you no longer believe in. If the original stop was wrong, exit at the original stop; re-enter only if the thesis is still alive.
Using the position sizing calculator
The Position Sizing Calculator takes: account size, risk per trade (%), entry price, stop-loss price, an optional take-profit, long/short direction, and the number of identical positions. It returns:
- Shares/units — the position size from the formula above
- Position value — shares × entry, shown so you can see how much of the account it occupies
- Risk amount — the fixed $ you lose if the stop is hit
- Potential profit and R:R ratio — from the optional take-profit
- Total exposure — position value × number of positions as a % of the account
It refuses to compute a long whose stop sits above entry (or a short whose stop sits below) — that combination is not a trade, and sizing against the wrong side of entry is a classic silent error. It also warns when a single position exceeds 20% of the account or total exposure exceeds 100%. Everything runs client-side; nothing is transmitted. The Position Size Calculator is the simpler four-input variant — account, risk %, entry, stop — with whole-share rounding and 2:1 / 3:1 risk-reward projections, useful when you just want the share count fast. For the reward side of the math, the Risk/Reward Calculator covers the ratio itself.
Position sizing vs the Kelly criterion
Fixed-percentage risk sizing is robust on purpose: it never asks how strong your edge is, so it never misprices a size because of an overconfident win-rate estimate. Its cost is that it never scales up when the edge genuinely is large, and never shrinks when it is tiny. The Kelly criterion is the opposite policy — stake proportional to the estimated edge — which makes it optimal in theory and dangerously sensitive to the same estimation errors fixed sizing ignores. The working combination, covered in depth in the Kelly criterion guide: size the trade from your fixed risk percentage as usual, compute half Kelly on your edge estimate, and take the smaller of the two. The stop-based size is the floor; Kelly is the ceiling. Once the sized strategy is running, the Sharpe ratio is the right yardstick for whether the whole package — size, stop, entry — is working.