Risk Management

The Position Sizing Formula Every Trader Must Know

Position sizing converts your risk tolerance and stop distance into the correct number of shares or units.

Key rules

  1. Position Size = (Account × Risk%) ÷ Stop Size
  2. Risk the same dollar amount on every trade, not the same number of shares
  3. Account for spread/commission in your stop size calculation
  4. Never eyeball position size — calculate it every time
  5. Most professionals risk 0.5%–1.5% per trade maximum

The formula: Position Size = (Account × Risk%) ÷ Stop Distance in Price. If you risk 1% of a $10,000 account ($100) with a $0.50 stop, you trade 200 shares. This ensures every trade risks the same dollar amount regardless of volatility.

This is the most important formula in trading. Without it, traders size arbitrarily and one large loss undoes weeks of gains.

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