Position Sizing
Position sizing is the practice of determining how many shares or contracts to trade based on account size and risk tolerance. The standard formula is: Position Size = (Account × Risk %) ÷ (Entry − Stop).
Definition
Position sizing determines the quantity of shares, contracts, or units to trade in a given setup. It's the single most important factor in long-term trading survival — more important than entries, exits, or indicators. Position sizing links two key variables: your account size and your stop loss distance. The goal is to risk a consistent percentage of your capital per trade, typically 1-2%.
Formula
Position Size = (Account Size × Risk %) ÷ (Entry Price − Stop Loss Price)
Example
A $10,000 account risking 2% ($200) with a $5 stop loss = 40 shares (200 ÷ 5).