The position sizing formula
Position sizing answers one question: how big can this trade be so that hitting my stop costs me only what I decided to risk?
position size = (account × risk %) ÷ |entry − stop|, rounded down to a whole share.
- Account: the capital you size from (many traders use current account equity).
- Risk %: the share of the account you accept losing on this trade if the stop is hit.
- |entry − stop|: the risk per share, the distance to your stop.
You round down because rounding up would put more than your chosen amount at risk. The position size calculator runs the same formula.
A worked example
Account: $25,000. Risk per trade: 1%. Planned entry $50.00, stop $48.00.
- Money at risk: $25,000 × 1% = $250
- Risk per share: $50.00 − $48.00 = $2.00
- Position size: $250 ÷ $2.00 = 125 shares
- Position value: 125 × $50.00 = $6,250
Notice that the position value ($6,250) is much larger than the risk ($250). Position sizing controls the loss at the stop, not the size of the position. That distinction matters in the next sections.
If you trade a short position, the stop sits above the entry, but the formula is unchanged because it uses the absolute distance. Entry $50.00 short with a stop at $52.00 is still $2.00 of risk per share and still 125 shares at $250 of risk. Record the planned risk in dollars next to every trade; it is the number that defines 1R for that trade when you review it later.
How risk % changes the size
Same account and same trade ($25,000, entry $50.00, stop $48.00), different risk settings:
| Risk per trade | Money at risk | Shares | Position value |
|---|---|---|---|
| 0.5% | $125 | 62 | $3,100 |
| 1% | $250 | 125 | $6,250 |
| 2% | $500 | 250 | $12,500 |
At 0.5%, $125 ÷ $2.00 = 62.5, rounded down to 62 shares, so the actual risk is $124. The risk percentage you choose is a personal decision that depends on your circumstances; this guide does not recommend one.
Fixed-fractional vs fixed-dollar sizing
There are two common ways to set the "money at risk" part of the formula.
| Fixed-fractional | Fixed-dollar | |
|---|---|---|
| Risk per trade | A % of current account | The same $ amount every trade |
| After losses | Risk shrinks as the account shrinks | Risk stays the same |
| After gains | Risk grows with the account | Risk stays the same |
| Simplicity | Recalculate the $ amount as equity changes | One number to remember |
Fixed-fractional example: 1% of $25,000 is $250. After a drawdown to $22,000, 1% is $220, so the next trade is smaller.
Fixed-dollar example: you risk $200 on every trade. With entry $50.00 and stop $48.00 that is $200 ÷ $2.00 = 100 shares, whatever the account did last week.
Either way, the stop distance still sets the share count. Both methods keep the loss at the stop roughly constant in whatever unit you chose, which is what makes results comparable in R-multiples.
Whichever you use, write the rule down and log the planned risk on every trade. Without that number you cannot compute R later, and you cannot tell whether a bad month came from the strategy or from inconsistent sizing.
The tight-stop trap: check position value too
The formula divides by the stop distance, so a very tight stop produces a very large position. Same $25,000 account and $250 risk, but a stop only $0.25 away:
$250 ÷ $0.25 = 1,000 shares, worth 1,000 × $50.00 = $50,000, twice the account.
Before you act on any size, check:
- Buying power. Can your account even hold this position? A cash account cannot exceed its cash; margin rules vary by broker and country.
- Gap risk. A stop does not guarantee its price. If the stock opens far below your stop, a 1,000-share position loses far more than $250. See stop loss vs stop limit.
- Liquidity. Large size in a thinly traded stock can move the price against you on entry and exit.
- Concentration. Some traders also cap position value at a share of the account, whatever the formula says.
Common position sizing mistakes
- Sizing by conviction. Taking a bigger position because a trade "looks great" breaks the link between risk and size. Your journal can test whether high-conviction trades actually do better.
- Sizing by share count or position value. Buying 100 shares of everything means a $10 stock with a $0.50 stop and a $200 stock with a $10 stop carry very different risk.
- Setting the stop after the size. If you choose the share count first and then place the stop wherever the money runs out, the stop is set by your wallet, not by the trade.
- Forgetting costs. Commissions, fees and the spread are part of the loss when a stop is hit. On small stops they can be a meaningful share of the risk.
- Ignoring correlated positions. Five positions in similar stocks, each risking 1%, can behave like one position risking more than 1% if they all move together.
- Changing risk % after a streak. Raising risk after wins or doubling after losses changes the strategy you are measuring. If you change it, log the date so your review can separate the two periods.
Sizing options and other instruments
The same idea works for other instruments if you express risk per unit correctly:
- Standard US equity options: risk per contract = premium distance to your exit plan × 100 (the usual contract multiplier). If you buy an option and plan to hold to expiry, the most you can lose is the premium paid.
- Futures and F&O: multiply the price distance by the contract's multiplier or lot size, which is set by the exchange.
The options trading journal guide shows how to log cost basis with the multiplier.
Checking that your sizing actually holds
Sizing only works if your real losses match your planned risk. In your journal, compare each losing trade's loss with the risk you planned for it. If losers regularly come in at 1.5R or 2R, the cause is usually moved stops, gaps or slippage, not the formula. Measuring results in R makes this visible straight away; the R-multiple calculator does it for a single trade, and the journal spreadsheet shows the columns to track it over many.
This guide is educational only and does not recommend a risk level or strategy.