Position Sizing

Position sizing is deciding how much to buy or sell on a trade. It is the single most important risk decision you make, more important than which stock you pick or exactly where you enter. The goal is simple: if the trade hits your stop, you lose only a small, planned amount of your account. Get this right and no single trade, and no normal losing streak, can do serious damage.

The core formula#

Position size = Amount you are willing to risk ÷ Risk per unit
Risk per unit = |Entry price − Stop price|

The amount you are willing to risk is usually a fixed percentage of your account, such as 1%. See Fixed Percentage vs Fixed Dollar Risk.

The position's dollar value changes with the stop distance; the risk does not. That is the whole idea.

Sizing in other markets#

Forex#

Risk per unit is measured in pips and pip value.

See Pips and Pipettes and Pip Value Calculator.

Futures#

Risk per contract = stop distance in ticks × tick value. If the risk per contract exceeds your allowed risk, the trade is too large even at one contract; use a micro contract or skip it. See Tick Size and Tick Value.

Options#

For bought options, the maximum loss is the premium, so size by premium at risk: a $300 maximum risk allows one contract costing $3.00, not ten. See Options Trading.

How much should you risk per trade?#

With 1% risk, ten losses in a row cost about 10% of the account. With 5% risk, the same streak costs about 40%. See Losing and Winning Streaks and Risk of Ruin.

Adjusting for volatility#

Volatile assets need wider stops, which means smaller positions for the same risk. Many traders base stop distances on ATR, which automatically adjusts size to volatility. See Volatility and ATR-Based Sizing.

Total risk across positions#

Sizing each trade correctly is not enough if you hold many correlated positions. Five positions each risking 1% in highly correlated stocks can behave like one 5% bet. Track total open risk, often called portfolio heat. See Portfolio Heat and Correlation-Adjusted Sizing.

Common mistakes#

• Sizing by feel or confidence instead of by the stop.
• Using the same number of shares for every trade regardless of stop distance.
• Tightening the stop to buy more shares, which only increases the chance of being stopped out.
• Forgetting costs and slippage, which make real losses slightly larger than planned.
• Increasing size after losses to win money back.

Frequently asked questions#

How do I calculate position size?#

Divide the amount you are willing to lose on the trade by the distance between your entry and stop, in price or pips multiplied by pip value.

What percentage should I risk per trade?#

Many traders risk 0.5% to 2% of their account per trade, with 1% a common default.

Does position sizing matter more than entries?#

For long term survival, yes. Good entries with poor sizing can still destroy an account; average entries with disciplined sizing let you keep trading and improving.

Next, learn the most common sizing rule in detail: Fixed Percentage vs Fixed Dollar Risk.