Calculate the optimal number of shares or units to trade based on your account size, risk tolerance, and stop-loss distance. Protect your capital with precise, risk-based position sizing.
Position sizing is the process of determining how many shares, contracts, or units to buy or sell on a given trade. It is one of the most critical components of a sound trading plan, yet it is often overlooked by beginner traders. Proper position sizing ensures that no single trade can cause devastating damage to your account, regardless of the outcome.
The core idea is simple: instead of buying a fixed number of shares every time, you calculate your position size based on how much you are willing to lose if the trade goes against you. By tying your trade size to a specific risk amount and your stop-loss distance, you maintain consistent risk across all trades, whether you are trading a $10 stock or a $500 stock.
Calculating position size involves three key inputs: your account balance, your risk percentage, and the distance between your entry price and stop-loss price. Follow these steps to determine the right number of shares for any trade:
Several well-known rules guide traders when it comes to position sizing and risk management. Whether you're trading a moving average crossover strategy or using the RSI indicator, proper position sizing ensures that even losing streaks don't devastate your account:
Position size = (Account Balance x Risk %) / Stop Loss Distance. For example, if you have a $10,000 account, risk 2% per trade ($200), and your stop loss is $5 away from your entry price, your position size would be 40 shares ($200 / $5). This ensures you never lose more than your predetermined risk amount on any single trade.
The 2% rule states that you should never risk more than 2% of your total trading account on a single trade. For a $10,000 account, this means the maximum you should risk on any trade is $200. This rule helps protect your capital from a series of losing trades and ensures long-term survival in the markets. Even with 10 consecutive losing trades, you would only lose approximately 18% of your account.
Percentage-based position sizing is generally better because it automatically adjusts your trade size as your account grows or shrinks. When you are winning, your positions grow larger to capitalize on momentum. When you are losing, your positions shrink to preserve capital. Fixed position sizing does not adapt to account changes and can lead to over-risking on a declining account or under-utilizing a growing one.
Wider stop losses result in smaller position sizes, while tighter stop losses allow for larger positions. This inverse relationship ensures your dollar risk stays constant regardless of where you place your stop loss. For example, with a $200 risk budget, a $2 stop gives you 100 shares, while a $10 stop gives you only 20 shares. Always place your stop loss at a technically meaningful level first, then let the position size calculator determine the appropriate trade size.
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