Position sizing is the single most important risk management skill in day trading. Trade too large and one bad trade can devastate your account. Trade too small and you will never make meaningful profits. This guide teaches you how to calculate the perfect position size for every trade.
What is Position Sizing?
Position sizing determines how many shares or contracts you trade based on your account size and risk tolerance. It ensures that no single trade can cause significant damage to your trading capital, while still allowing for meaningful profits when you are right.
The golden rule: Never risk more than 1-2% of your account on any single trade. This means if you have a $50,000 account, your maximum loss per trade should be $500-$1,000.
The Position Sizing Formula
The basic formula for calculating position size is:
Position Size = Account Risk / Trade Risk
Where:
- Account Risk = Your account size multiplied by your risk percentage (e.g., 1%)
- Trade Risk = The dollar amount between your entry price and stop loss
Position Sizing Example
You have a $25,000 account and want to risk 1% per trade ($250). You want to buy a stock at $50 with a stop loss at $49.
- Account Risk: $25,000 x 1% = $250
- Trade Risk: $50 - $49 = $1 per share
- Position Size: $250 / $1 = 250 shares
You would buy 250 shares. If your stop loss hits, you lose $250 (1% of your account).
Why Position Sizing Matters
Proper position sizing provides several critical benefits:
- Survival: Even a string of losing trades will not blow up your account.
- Consistency: Your emotional state remains stable when risk is controlled.
- Compounding: Protecting capital allows you to benefit from long-term growth.
- Better decisions: When risk is defined, you can focus on the trade setup.
Choosing Your Risk Percentage
Most professional traders risk between 0.5% and 2% per trade. Here is how to choose:
Conservative: 0.5% Risk
- Best for beginners learning the markets
- Suitable for strategies with lower win rates
- Allows for more trades to learn from mistakes
Standard: 1% Risk
- The most common professional approach
- Good balance of growth and protection
- Suitable for most day trading strategies
Aggressive: 2% Risk
- Only for proven strategies with high win rates
- Can lead to larger drawdowns
- Requires strong emotional discipline
Pro tip: Start with 0.5% risk until you have proven your strategy works. Then gradually increase to 1% as you gain confidence and show consistent results.
Position Sizing Based on Volatility
Not all stocks are created equal. A volatile stock requires smaller position sizes than a stable one. The Average True Range (ATR) helps adjust for volatility:
ATR-Based Position Sizing
The ATR measures average price range over a period (typically 14 days). Use it to set stops and size positions:
Volatility-Adjusted Example
Stock A has an ATR of $0.50. Stock B has an ATR of $2.00. With the same account and risk percentage:
- Stock A: $250 risk / $0.50 stop = 500 shares
- Stock B: $250 risk / $2.00 stop = 125 shares
You hold more shares of the stable stock because the stop loss can be tighter.
Fixed Dollar vs Percentage-Based Sizing
There are two main approaches to position sizing:
Fixed Dollar Risk
Risk a fixed dollar amount per trade (e.g., $100). This is simple but does not scale with account growth.
- Pros: Easy to calculate, consistent dollar exposure
- Cons: Does not grow with your account, may become too small as account grows
Percentage-Based Risk
Risk a fixed percentage of your current account value. This scales naturally with account size.
- Pros: Scales with account, protects during drawdowns (smaller sizes when losing)
- Cons: Requires recalculation as account value changes
Position Sizing for Different Trade Types
Scalping
Tight stops and quick trades. You might trade larger size because your stop loss is very close.
- Stop distance: $0.05 - $0.20
- Position size: Can be larger due to tight stops
Day Trading
Standard intraday moves with moderate stops.
- Stop distance: $0.20 - $1.00 depending on stock price
- Position size: Standard 1% risk calculation
Swing Trading
Wider stops for multi-day holds require smaller position sizes.
- Stop distance: $1.00 - $5.00 or more
- Position size: Smaller to accommodate wider stops
Common Position Sizing Mistakes
Avoid these errors that destroy trading accounts:
- Trading the same size regardless of setup: Tighter stops should mean more shares, wider stops mean fewer shares.
- Risking too much on high conviction trades: Even your best ideas can fail. Stick to your risk limits.
- Ignoring commissions and slippage: Factor these into your calculations.
- Increasing size after losses: This is revenge trading and leads to account destruction.
- Not adjusting for account changes: Recalculate your position sizes as your account grows or shrinks.
Building a Position Sizing System
- Define your risk percentage: Start with 1% or lower.
- Calculate dollar risk: Account size times risk percentage.
- Set your stop loss: Based on technical levels, not arbitrary amounts.
- Calculate position size: Dollar risk divided by stop distance.
- Verify the position: Make sure the total position value is reasonable for your account.
- Document everything: Track your position sizes and outcomes.
Automate Your Position Sizing
Pro Trader Dashboard calculates optimal position sizes for every trade based on your account and risk parameters. Never risk too much or too little again.
Summary
Position sizing is the foundation of risk management. Use the formula: Position Size = Account Risk / Trade Risk. Never risk more than 1-2% per trade. Adjust your position size based on stop loss distance and stock volatility. Start conservatively and increase as you prove your edge. Proper position sizing keeps you in the game long enough to become profitable.
Continue your risk management education with our guide on day trading risk control or learn about exit strategies.