Two traders run the same strategy, take the same signals and lose the same four trades in a row. One risked 10% of the account each time and is down 34%. The other risked 1% and is down 3.9%. Position sizing is the only difference between them.
What position sizing is
Position sizing is the number of shares you buy. It is decided by two numbers you already have: how much of the account you are willing to lose on this trade, and how far the stop sits from the entry.
Everything else about the trade, including whether it works, is outside your control at the moment you place it. The share count is not.
Why position sizing matters: the arithmetic
Four consecutive losses at 10% of the account leaves 0.9 to the fourth power, or 65.6% of the starting balance. Getting back to even from there needs a 52.4% gain, because the gain is calculated on the smaller number.
Four consecutive losses at 1% leaves 0.99 to the fourth power, or 96.1%. Recovering needs 4.1%.
A 52.4% gain and a 4.1% gain are not the same task. Ten consecutive losses gives the same shape: 90.4% of the account left at 1% risk, 81.7% at 2%, and 59.9% at 5%.
The fixed percentage risk model
The standard method has three steps.
- Choose the fraction of the account you will risk on one trade. This article uses 1%.
- Find the distance from your entry to your stop.
- Divide.
Position size equals account risk divided by risk per share. Account risk is account size times your risk percentage. Risk per share, for a long, is the entry price minus the stop price.
A worked calculation
The example below is hypothetical. Take a $50,000 account and a 1% risk setting, which is $500. The entry is $100 and the stop is $95, so risk per share is $5.
$500 divided by $5 is 100 shares. That position is worth $10,000, or 20% of the account, and if the stop is reached it costs $500, which is the 1% you chose.
Notice what happened: you never picked the position size. You picked the risk and the stop, and the size fell out of them.
How your risk percentage changes the arithmetic
Rather than sorting traders into types, look at what each setting costs after a bad run. At 1% risk, ten losses in a row leave 90.4% of the account. At 2% they leave 81.7%. At 5% they leave 59.9%, which needs a 67% gain to undo.
Larger risk per trade also means a wider range of outcomes in both directions. Pick the number you can hold to through a losing streak you have not had yet, because that is the run that decides whether you keep using the rule.
A position sizing calculator you can run by hand
Four steps, worked on a $50,000 account at 1% risk.
Step 1, the risk amount. $50,000 times 0.01 is $500.
Step 2, the stop distance. An entry at $85 with a stop at $80 gives $5 of risk per share.
Step 3, the share count. $500 divided by $5 is 100 shares.
Step 4, the position value. 100 shares at $85 is $8,500, which is 17% of the account.
The same account at different stop distances
Every row below is the same $50,000 account, the same 1% risk and the same $85 entry. Only the stop distance changes. Share counts are rounded down.
| Stop distance | Share count | Position value | Share of account |
|---|---|---|---|
| $2 | 250 | $21,250 | 42.5% |
| $3 | 166 | $14,110 | 28.2% |
| $5 | 100 | $8,500 | 17.0% |
| $8 | 62 | $5,270 | 10.5% |
| $10 | 50 | $4,250 | 8.5% |
The last column is the point of the table. A tight stop buys you a large position, and the $2 row puts 42.5% of the account into one stock. Your loss is still capped at $500 if the stop works. It is not capped if the stock gaps through it overnight, and the size of that overrun scales with the position value, not with the stop distance.
Why a maximum position size exists
A stop limits the loss when price moves through your level in an orderly way. A gap skips it. If a stock closes at $85 and opens at $70, your $80 stop fills near $70, and the loss is three times the one you planned.
That risk is proportional to how much money is in the position, which is why a second cap on position value sits on top of the risk calculation. Choose a ceiling as a share of the account, write it down, and when the risk formula returns a position above it, take the smaller number or skip the trade. The tighter your stops, the more often that ceiling will bind.
Adjusting position size for volatility
A stock that moves $6 a day needs a wider stop than one that moves $1, and a wider stop means fewer shares for the same dollar risk.
Using ATR for position sizing
Set the stop as a multiple of Average True Range and the share count follows. Position size equals account risk divided by ATR times the multiplier.
With $500 of account risk, a $4 ATR and a 2 times multiplier, that is $500 divided by $8, or 62 shares after rounding down.
Setting your own volatility bands
Compare ATR to the share price and you get a single number for how much a stock moves relative to what it costs. Decide in advance what counts as high for you, then lower the risk percentage on anything above that line and accept the wider stop. Below the line, the standard setting applies. What matters is that the threshold is a number you wrote down, not a judgement you make after seeing the chart.
Managing several positions at once
Total portfolio risk
Risk adds up. Five positions at 1% each is 5% of the account at risk if every stop is reached, and stops do get reached together. Decide the total you accept across all open trades, and stop taking new positions when the sum reaches it.
Correlation
Three stocks in the same sector are not three independent bets. In a sector-wide fall, all three stops go in the same session, so 3% of exposure behaves like a single 3% trade. Treat correlated positions as one position when you add up your total risk, not as three.
Scaling position size into and out of a trade
Adding to a winner
The example below is hypothetical, on a $30,000 account at 1% risk, which is $300.
You bought 100 shares at $50 with the stop at $47, so risk per share was $3 and the total risk was $300. Price rises to $55 and you move the stop to $50, which takes the planned loss on that block to zero.
The addition is a new calculation, not a continuation of the old one. At $55 with a stop at $52, risk per share is $3 again, so $300 divided by $3 is another 100 shares. Run the formula fresh every time. Do not average down: adding below your entry increases the loss the original stop was sized to cap.
Scaling out
Exiting in parts is the mirror image. One version, used here as an example: sell a third at 1R, sell a third at 2R, and trail the stop on the rest. You give up part of the upside in exchange for banking a result before the trade can reverse.
Position sizing mistakes
- Risking too much per trade. The arithmetic above is the argument. A number you chose because it felt right will not survive the first losing streak.
- Sizing by feeling. A position that is bigger because you liked the chart more is a position whose loss you did not choose. Run the formula on every trade, including the obvious ones.
- Ignoring the stop distance. Putting the same dollar amount into every trade means your loss changes with the chart. Two trades with the same position value and different stops are two different risks.
- Using one size for calm and volatile stocks. ATR is the correction. Same dollar risk, different share count.
- Concentrating the account. Any single position large enough to matter on a gap defeats the calculation that produced it.
Position sizing quick reference
Risk in dollars, by account size and risk percentage.
| Risk % | $25,000 account | $50,000 account | $100,000 account |
|---|---|---|---|
| 0.5% | $125 | $250 | $500 |
| 1% | $250 | $500 | $1,000 |
| 1.5% | $375 | $750 | $1,500 |
| 2% | $500 | $1,000 | $2,000 |
Divide any figure in this table by your risk per share to get the share count.
Running position sizing in Swingfolio
The position size calculator takes your entry price, stop price, account value and risk percentage, plus an optional target. It returns the share count, the investment amount, the dollar risk, the stop distance and the risk-to-reward ratio. That is the four steps above with the rounding done for you.
Inside the app, the trade form shows the dollar risk, the dollar reward, the ratio and the trade's risk as a percentage of your portfolio value while you type. It turns that last figure amber above 3% and shows a warning line above 5%. If the number surprises you, the stop or the share count is wrong.
Work out your share count before you place your next order, not after. Start the 30-day trial.