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Position sizing in trading: the formula and worked examples

Position sizing decides how much you can lose before the trade starts. Get it right and no single trade can hurt your account.

Account riskStop distanceSize

The position sizing formula

Position size = (Account × Risk %) ÷ (Entry − Stop + costs per share)

Pick a fixed risk percentage (many traders use 0.25–1%), find where your idea is proven wrong, then let the distance to that stop set your size. The stop comes from the chart; the size comes from the math. Nothing about the trade — how good it looks, how much you want it — belongs in the calculation.

The four-step method

01

Fix the risk before the trade

Choose one percentage of your account and write it down. Most traders use 0.25%–1% per trade; 2% is already aggressive. On a $10,000 account, 1% is $100 — that number is the most you agree to lose on this idea, whatever the chart does.

02

Find the price that proves you wrong

Place the stop where your reason for entering stops working — below structure, under the level, past the volatility — not wherever the money runs out. If that price is too far away to trade, the trade is too big, not the stop too tight.

03

Measure the distance per share

Entry minus stop is your risk per share. Add round-trip costs (commission, spread, fees) so the number is real. A $50 entry with a $48 stop and $0.10 of costs risks $2.10 per share, not $2.00.

04

Let the math set the size

Divide planned dollars by risk per share and round down to a whole share or contract. Never round up. If the answer is 142.5 shares, trade 142 — the half share you gave back is the price of staying inside the plan.

Worked examples

Each example below uses the same formula. The only thing that changes is the stop distance, which is exactly the point: the market decides how far away your stop belongs, and your size adjusts to it.

Stock trade, $10,000 account

Risk 1% = $100. Entry $50, stop $48, so $2 risk per share. Size = $100 ÷ $2 = 50 shares. If stopped out you lose $100 — exactly the plan, whether or not the idea was any good.

Wider stop, same risk

Same $100 risk, but the chart needs a stop at $45 ($5 per share). Size = $100 ÷ $5 = 20 shares. A wider stop means a smaller position, not a bigger loss — your dollars at risk never changed.

Costs included

A $38,000 account limits risk to 0.75% = $285. Entry $71.80, stop $69.90 is $1.90 per share, plus $0.10 of round-trip costs = $2.00. Size = $285 ÷ $2.00 = 142.5 → 142 shares.

Small account, tight stop

An $18,000 account risks 0.5% = $90. Entry $42.00, stop $40.50 is $1.50 per share, plus $0.10 costs = $1.60. Size = $90 ÷ $1.60 = 56.25 → 56 shares, not 60.

Futures contract

A contract moves $50 per point and your stop is 4 points away: $200 risk per contract. With $400 of planned risk, trade 2 contracts — never round up to 3 because 2 felt small.

Both inputs doubled

Double your risk budget and double the stop distance and size does not move: the numerator and the denominator both double. Sizing only changes when one of them moves on its own.

Dollars at risk at a glance

Fix the percentage first, then read the number. These are the maximum losses you agree to before the order goes in — not the losses you end up taking, which is why the stop has to be real.

Account0.25%0.5%1%2%
$5,000$12.50$25$50$100
$10,000$25$50$100$200
$25,000$62.50$125$250$500
$50,000$125$250$500$1,000
$100,000$250$500$1,000$2,000

A 1% plan survives ten straight losers with about 10% gone. A 3% plan in the same streak is down roughly a quarter of the account, and the size needed to recover grows faster than the size you are willing to risk.

Total open risk (heat)

Per-trade risk keeps one idea from hurting you. A heat ceiling keeps a cluster of correlated ideas from doing it together. If your ceiling is 1.5% and you already hold two positions at 0.6% each, a third 0.6% setup pushes you to 1.8% — so you skip it, or size it down until the total sits at or under 1.5%. Positions that move together count as one position for this purpose, even when they carry different tickers.

Common position sizing mistakes

  • Choosing share count first and placing the stop wherever the money runs out.
  • Sizing every trade the same number of shares regardless of stop distance.
  • Raising size after a loss to “win it back” — the plan is what repeats, the mood is not.
  • Ignoring slippage and gaps, so real losses exceed the planned amount.
  • Counting only the entry price and leaving commission, spread and fees out of the math.
  • Adding a second full-size position in the same sector and calling it diversification.
  • Treating a stop as a suggestion and “waiting for the bounce” — that is when 1R becomes 4R.

Pre-trade checklist

  1. 01Risk percentage written down before the order goes in.
  2. 02Stop placed at the price that proves the idea wrong, not at a dollar amount.
  3. 03Costs added to risk per share.
  4. 04Size rounded down to whole shares or contracts.
  5. 05Total open risk after this trade still inside the heat ceiling.
  6. 06Worst case spoken out loud: if every open trade stops, the account loses X%.

At the live tables

Practice sizing with free chips

  1. Take a seat at Micro 1/2. Treat your stack as the account and pick a risk percentage before the first hand.
  2. Before every call, write down the chips you are willing to lose on that decision — your 1R — and compare them with the chips in the pot.
  3. Fold when the price of the call exceeds the value of the pot, and log the result of each decision in R instead of chips.
Practice at the tables →

Free-play chips only. No real money.

Position sizing FAQ

▸What percentage should I risk per trade?
There is no correct number, but it has to be fixed in advance and small enough that a string of losers stays survivable. Ten losses in a row at 1% costs about 10%; at 3% it costs roughly 26%. Traders who size for the worst streak they could plausibly face are the ones still trading after it.
▸Should position size ever change with conviction?
Only by rule. If you want a larger size for a stronger setup, define what qualifies as stronger and cap it — for example 1% standard, 1.5% maximum. A size that changes with how the trade feels is not a size, it is a mood.
▸How do costs change the answer?
They shrink the position. On the $38,000 example, ignoring the $0.10 of round-trip costs gives 150 shares instead of 142 — about 6% more risk than planned, on every single trade, compounding with the losses.
▸What is open risk or heat?
The sum of planned risk across every position that could stop at once. Two trades at 0.6% and a third at 0.6% is 1.8% of heat. If your ceiling is 1.5%, the third trade is either skipped or sized so the total stays at or under the ceiling.
▸Does a wider stop mean more risk?
No — a wider stop means a smaller position. Risk is dollars, and dollars are fixed by your percentage. The stop distance only decides how many shares that budget buys.

Test yourself

The free risk management quiz includes position sizing arithmetic of exactly this kind — costs included, rounded down — alongside four other core topics. Position sizing is also lesson one of the Risk Management Training Course. Related reading: R-multiples, risk vs. reward, profit factor and risk management in trading.