Position Sizing, Explained
After reading this you will be able to work out exactly how many shares to buy so that a single losing trade costs you a fixed, pre-decided fraction of your account, no matter how far away your stop-loss sits.
What position sizing is
Position sizing answers one narrow question: given the trade you want to take, how many shares should you buy? Not "is this a good trade" and not "where should the stop go." Those come first. Position sizing takes your entry price, your stop-loss price and a rule about how much money you are willing to lose, then turns them into a share count.
Here is the hook. Suppose you have 10000 in your account and you decide that no single trade may cost you more than 1% of it, so 100. You plan to buy at 50 and place a stop at 47. If the stop is hit you lose 3 per share. To cap the loss at 100 you can hold at most 100 / 3 = 33 shares. That is the whole idea. The rest of this article shows where each number comes from and where people get it wrong.
When to use it, and when not
Use position sizing whenever you trade with a defined exit for losses, that is, a stop-loss. Swing trades, breakout trades, any plan where you can say "if price reaches X, I am wrong and I get out" fits this method exactly.
Do not use it as a substitute for judgement about the trade itself. The calculator will happily size a terrible trade. It also assumes you can actually exit near your stop price. In fast markets a stop set at 47 might fill at 46.20, so your real loss exceeds the plan. And it does not apply cleanly to buy-and-hold investing, where you have no stop and size by allocation instead.
The 1 to 2 percent rule is not a law of nature. It exists so that a losing streak dents your account instead of ending it. Ten losses in a row at 1 percent each leaves you with about 90 percent of your money; ten losses at 10 percent each leaves you with about 35 percent.
The formula and why it works
The method rests on separating two things that people usually blur together: how much money you risk, and how far the price has to move against you.
Here R is the cash you are willing to lose on the trade, A is your account size, and p is the risk percent. With A = 10000 and p = 1, you get R = 100.
d is the risk per share, the distance from your entry price E to your stop price S. The absolute bars mean it works for short trades too, where the stop sits above entry. With E = 50 and S = 47, d = 3.
N is the number of shares, and the floor brackets \lfloor \cdot \rfloor mean you round down to a whole share. Rounding down keeps your loss at or below R rather than above it. With R = 100 and d = 3, N = \lfloor 33.33 \rfloor = 33.
Notice what the formula does not contain: the entry price by itself never sets the share count. A wide stop shrinks your position; a tight stop grows it. That is the point. Two trades with the same 1 percent risk can hold wildly different share counts because their stops sit at different distances.
Worked example using the demo data
Sizing a long trade at entry 50, stop 47
These are the tool's default values. Press the demo button and you should reproduce every number below.
- Cash at risk: R = 10000 \times 0.01 = 100.
- Risk per share: d = |50 - 47| = 3.
- Shares: N = \lfloor 100 / 3 \rfloor = 33.
- Actual dollar risk: 33 \times 3 = 99, which is at or under your
100limit. - Capital deployed: 33 \times 50 = 1650, about 16.5 percent of the account.
The optional target price of 60 lets you check the trade's reward. Profit if the target hits is 33 \times (60 - 50) = 330. Compare that to the 99 at risk and the reward-to-risk ratio is 330 / 99 \approx 3.33. You risk 1 to make about 3.3.
A reward-to-risk ratio above 2 gives you room to be wrong often and still come out ahead. At 3.33 to 1 you can lose two trades for every one you win and still break even before costs.
How stop distance reshapes the position
The single most useful thing to internalise is that the share count moves inversely with stop distance while dollar risk stays flat. The table holds the account at 10000, risk at 1% (so R = 100) and entry at 50, then varies the stop.
| Stop | Risk/share | Shares | Capital used | Actual risk |
|---|---|---|---|---|
| 49.00 | 1.00 | 100 | 5000 | 100.0 |
| 48.00 | 2.00 | 50 | 2500 | 100.0 |
| 47.00 | 3.00 | 33 | 1650 | 99.0 |
| 45.00 | 5.00 | 20 | 1000 | 100.0 |
| 40.00 | 10.00 | 10 | 500 | 100.0 |
A stop at 49 lets you hold 100 shares; a stop at 40 lets you hold only 10. The loss if stopped out is roughly 100 in every row. The wider stop is not riskier in dollar terms, it just holds fewer shares.
Reading and interpreting the result
The share count is the headline, but three other numbers deserve your attention.
- Actual dollar risk
- Because of rounding down, this is usually a little below your limit.
33shares at3per share risks99, not100. That gap is fine and always in your favour. - Capital deployed
- N \times E. At
1650on a10000account you are using 16.5 percent of your cash to risk 1 percent. If a tight stop pushes this above your account you simply cannot afford the full position, or you are using leverage. - Reward-to-risk
- If you entered a target, compare potential profit to actual risk. Below 1 you are risking more than you stand to gain, which needs a very high win rate to survive.
Common mistakes
The most expensive error is sizing off the entry price instead of the stop distance. "I put 20 percent of my account in each trade" ignores how far the stop sits, so a wide-stop trade and a tight-stop trade carry completely different real risk.
Other traps come up often. Ignoring commissions and the bid-ask spread understates your loss; on small accounts a 5 commission each way turns a 99 planned loss into 109. Assuming the stop fills at your exact price ignores slippage and gaps, especially overnight. And moving the stop wider after entry, to "give the trade room," quietly raises your risk above the amount you sized for. If you must widen the stop, the honest move is to cut the share count to match.
One more: risking a percent of a shrinking account. If you always risk 1 percent of the current balance, your position sizes fall automatically during a drawdown. That is a feature, not a bug, but recompute R from today's balance rather than last month's.
Related tools
Position sizing controls the downside of one trade. To study returns and growth, these help. Use the ROI Calculator to measure return on a completed trade, and the Crypto Profit Calculator when exchange fees and break-even matter. For longer horizons, the Investment Growth Calculator projects a portfolio with monthly contributions, and the CAGR Calculator turns two account values into an annual growth rate. If you build a position over several buys, the Stock Average Price Calculator gives your blended cost per share.
Frequently asked questions
What percent should I risk per trade?
Most trading plans use 1 to 2 percent. At 1 percent, a run of ten losses leaves you near 90 percent of your account. The right number depends on your win rate and how much drawdown you can tolerate, not on how confident you feel about a single trade.
Why does the calculator round shares down?
Rounding down keeps your actual loss at or below your limit. Rounding 33.33 up to 34 shares would risk 102 against a 100 cap. The extra third of a share is not worth breaking your own rule.
Does this work for short selling?
Yes. For a short, the stop sits above your entry, so risk per share is d = S - E. The absolute-value form d = |E - S| handles both directions and the share count formula is unchanged.
What if the required capital is more than my account?
That happens with a very tight stop. A 0.25 stop on a 50 entry at 1 percent risk wants 400 shares, or 20000 of stock on a 10000 account. Either the stop is unrealistically tight or you would need leverage, which raises risk beyond what you sized. Widen the stop or take fewer shares.
Should I include commissions in the risk?
Yes, if they are material. Subtract round-trip costs from your risk budget before dividing. On a 100 risk with 5 in and 5 out, size to 90 instead so the fees do not push your real loss over the line.
This is an educational estimate, not financial advice. Talk to a qualified adviser before making money decisions.
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