Why position size matters
Professional traders spend as much effort on how much to buy as on what to buy. Sizing each trade so that a loss costs a fixed, small share of the account keeps a losing streak from wiping it out.
The formula
- Amount at risk = account balance × risk per trade
- Risk per share = |entry price − stop-loss price|
- Shares = amount at risk ÷ risk per share, rounded down
Worked example
A $25,000 account, 1% risk per trade, entry at $50, stop-loss at $47, target at $59:
- Amount at risk: 25,000 × 1% = $250.
- Risk per share: 50 − 47 = $3.
- Shares: 250 ÷ 3 = 83.3, rounded down to 83.
- Position value: 83 × 50 = $4,150, about 16.6% of the account.
- Reward-to-risk: (59 − 50) ÷ 3 = 3R.
How much to risk
| Risk per trade | Loss after 10 straight losing trades |
|---|---|
| 0.5% | 4.9% |
| 1% | 9.6% |
| 2% | 18.3% |
| 5% | 40.1% |
Losses are hard to recover: a 40% drawdown needs a 67% gain to get back to even. That is why many traders cap risk at 1 to 2% per trade.
Reward-to-risk and win rate
A trade with a 3R target needs to win only about one time in four to break even before costs. A 1R target needs to win more than half the time. Combining a realistic win rate with your reward-to-risk ratio tells you whether a strategy has a positive expectancy.
Setting the stop
Place the stop where the trade idea is proven wrong, for example below a recent low or a support level, then size the position from that distance. Moving the stop to fit a larger position defeats the purpose.
Limits
- Stops can be skipped by price gaps, so actual losses may exceed the planned amount.
- Commissions, spreads and slippage add to the risk.
- Positions larger than the account require margin, which adds interest costs and the risk of margin calls.
This calculator gives estimates for education and planning. It is not investment, tax or legal advice; for decisions about your own situation, talk to a qualified financial professional.