Position sizing decides how many units to buy or sell, and therefore how much money is at risk on each trade. It is set from the amount you are willing to lose and the distance from your entry to your stop, not from how confident you feel about the idea. Good sizing keeps a run of losing trades survivable, which matters more than the size of any single winner.
This guide explains how to calculate a position size, shows the arithmetic with an invented account, explains why confidence is a poor guide to size, and covers how sizing interacts with the stop and with several open positions. The percentages used are illustrations, not recommendations.
What is position sizing?
Position sizing is the step between deciding to trade and placing the order. Once you know where the trade is wrong, you need to decide how many units to take so that the loss, if the stop is hit, is an amount you have accepted in advance.
The same idea applies to a long-term holding, where the question becomes how much of the account a single investment should represent.
Sizing is one of the most controllable parts of trading. You cannot choose whether the market moves your way, but you can choose how much each move can cost you. A trader who sizes every trade the same way keeps the results of individual trades from deciding the whole account.
How do you calculate a position size?
Divide the amount you are willing to risk by the loss per unit at the stop. If you risk 1 percent of a 10,000 account, that is 100, and a stop 2 below your entry means the loss per share is 2, so you can buy 50 shares.
The formula gives the same logic for any market, so long as the stop distance is known.
The table below uses an invented account and an illustrative risk figure of 1 percent. It is a worked example of the arithmetic, not a recommendation of any particular percentage.
| Step | Figure | What it means |
|---|---|---|
| Account size | 10,000 | The money available to trade |
| Risk per trade (1%) | 100 | The most you accept losing if the stop is hit |
| Entry price | 50 | Where the trade starts |
| Stop price | 48 | Where the trade is wrong |
| Loss per share (50 − 48) | 2 | The distance from entry to stop |
| Position size (100 ÷ 2) | 50 shares | The number of shares to buy |
| Position value (50 × 50) | 2,500 | The money committed to the trade |
If the stop is hit, the loss is 50 shares × 2 = 100, which is the 1 percent you chose. Add trading costs to the loss per share if they are large, because commissions and spreads increase the real loss when the stop is triggered.
Why not size by how sure you are?
Confidence is a poor input for sizing, because the same setup can fail several times in a row, and a trader who increases size after wins often takes the largest positions just before losses. A fixed rule for risk per trade treats each trade the same and keeps any single outcome from deciding the account.
The arithmetic shows why size matters. Three losses in a row at 1 percent each reduce a 10,000 account by about 300, or 3 percent. Three losses in a row at 10 percent each reduce it by about 27 percent, which takes a much larger gain to recover. Oversized positions turn an ordinary losing streak into a serious setback, even when the method itself is reasonable.
How does position size interact with the stop?
The stop sets the distance and the position size sets the money at risk. A wide stop needs a smaller position for the same amount of risk, and a tight stop allows a larger position. Choose the stop from the chart first, then size the trade, rather than the other way round.
Sizing a trade to fit a stop you want is a common way to hide an error.
A stop that is too tight to survive normal movement will be hit by noise. Sizing up to fit a tight stop does not make the trade better. It only makes the loss on each false alarm larger. If the stop must be wide to fit the chart, the position must be smaller, and that may mean the trade is not worth taking at the size you wanted.
What happens with several positions?
Open positions can be correlated, which means several trades can behave like one large trade. Two shares in the same sector can fall together, and two crypto assets can move in step. Limit the total risk across correlated positions, not just the risk on each one.
Many traders also set a cap on total open risk, so that a bad period across several trades cannot exceed a level they have decided in advance.
Position sizing for long-term holdings follows a similar logic. A single investment that grows to dominate the portfolio adds risk that the original plan did not intend. Review the weights from time to time, and rebalance if one holding has grown beyond the share you set.
How do you size a position for a long-term holding?
For a long-term holding, the question is how much of the portfolio one investment should represent. Many investors set a maximum weight, meaning the largest share of total assets they are willing to see in one holding, and review the weights on a fixed schedule.
The weight can drift upward when a holding grows faster than the rest. Rebalancing means selling part of the holding that has grown and buying the others, to restore the chosen weight. Rebalancing has costs and tax effects, so check them before you act, and treat the maximum weight as the rule rather than the amount you happen to hold on a given day.
Common mistakes
Sizing by the amount you want to make. Position size should follow from the loss you accept, not the gain you hope for.
Changing the risk per trade after a streak. Increasing size after wins, or cutting it sharply after losses, makes results depend on sequence rather than method.
Ignoring correlation. Several positions that fall together are a single large risk, even if each one looks small.
Using the same number of units for every trade. A fixed number of units ignores how much each trade risks. Size from the risk amount and the stop, so that a wide stop does not quietly double the loss.
Checklist
- Decide the most you will lose on any single trade, as an amount, before you look at the chart.
- Set the stop from the chart, and measure the distance from entry.
- Divide the risk amount by the loss per unit to find the position size.
- Add realistic costs to the loss per unit before you finalise the size.
- Check the total risk across all open positions, including correlated ones.
- Keep the risk per trade the same from one trade to the next.
- Record the size and the risk for every trade, so you can check the rule afterwards.
Key takeaways
Position size is the number of units you trade, set so that a stopped-out loss is an amount you accepted in advance. Divide the risk amount by the loss per unit at the stop, and keep the risk per trade consistent. Confidence is not a reliable guide to size, and correlated positions add up to a larger risk than each one suggests.
This guide is for general information, not financial advice. See the disclaimer.