How the position size formula works
Position sizing answers one question: how many shares can I buy so that, if my stop is hit, I lose only what I planned to? It's the difference between a bad trade and a bad month.
Shares = (Account × Risk %) ÷ (Entry − Stop)
Say you have a $10,000 account and risk 1% — that's $100 you're willing to lose. You enter at $50 with a stop at $48, so your risk per share is $2. Dividing $100 by $2 gives 50 shares. If your stop were tighter, at $49, your risk per share would be $1 and you could hold 100 shares for the same $100 of risk. The trade's structure sets your size — not a gut feeling.
Why size by risk, not by dollars
Sizing by a fixed cash amount ("I always buy $2,000") means every trade risks a different amount depending on where your stop is. Sizing by risk keeps each loss roughly equal, so no single trade can define your results. That consistency is what lets a positive edge compound over time.
Keep it consistentPick a risk % and stick with it across trades. Changing your risk based on how confident you feel is exactly how discipline slips.
Want the full picture? Read Risk management 101, or try the risk/reward calculator next.