Position sizing is arguably the most important aspect of trading that most beginners ignore. It does not matter how good your strategy is - if you risk too much on any single trade, you can blow up your account. A position size calculator ensures you risk the right amount on every trade.
Why Position Sizing Matters
Consider two traders with identical strategies:
- Trader A: Risks 20% of account per trade
- Trader B: Risks 1% of account per trade
After 5 consecutive losses (which happens to every trader), Trader A is down over 67% and needs a 200% gain just to break even. Trader B is down only 5% and can easily recover.
The Golden Rule: Never risk more than 1-2% of your trading account on any single trade. This ensures you survive losing streaks and stay in the game long enough to win.
The Position Size Formula
The basic formula for calculating position size:
Position Size Formula
Position Size = (Account Size x Risk %) / (Entry Price - Stop Loss)
Or equivalently:
Position Size = Dollar Risk / Risk Per Share
Breaking Down the Formula
- Account Size: Your total trading capital
- Risk %: Percentage you are willing to lose (typically 1-2%)
- Entry Price: The price you plan to buy at
- Stop Loss: The price where you will exit if wrong
Step-by-Step Calculation Examples
Example 1: Stock Trade
Setup
- Account size: $50,000
- Risk tolerance: 1% ($500)
- Stock entry price: $100
- Stop loss: $95
Calculation
Risk per share = $100 - $95 = $5
Position size = $500 / $5 = 100 shares
Result
Buy 100 shares. Total position value: $10,000
If stopped out, you lose exactly $500 (1% of account)
Example 2: Volatile Stock
Setup
- Account size: $50,000
- Risk tolerance: 1% ($500)
- Stock entry price: $50
- Stop loss: $45 (wider stop due to volatility)
Calculation
Risk per share = $50 - $45 = $5
Position size = $500 / $5 = 100 shares
Result
Buy 100 shares. Total position value: $5,000
Notice: Same dollar risk, but smaller position due to wider stop
Example 3: Options Trade
Setup
- Account size: $50,000
- Risk tolerance: 1% ($500)
- Option premium: $3.00 per contract
- Risk: Entire premium (worst case)
Calculation
Cost per contract = $3.00 x 100 = $300
Number of contracts = $500 / $300 = 1.67
Result
Buy 1 contract to stay within risk tolerance
Factors That Affect Position Size
Stop Loss Distance
The tighter your stop, the larger position you can take:
- Tight stop (2% away) = larger position size
- Wide stop (10% away) = smaller position size
- This is why entry timing matters - better entries allow tighter stops
Account Size
Smaller accounts face more constraints:
- May not be able to buy enough shares for proper risk management
- Round lot requirements can affect exact sizing
- Options can help with limited capital
Volatility
More volatile stocks need wider stops, which means smaller positions:
- Low volatility stock: tighter stop, larger position
- High volatility stock: wider stop, smaller position
- Consider ATR (Average True Range) when setting stops
Advanced Position Sizing Methods
Fixed Percentage Method
Risk a fixed percentage of your account on every trade (most common):
- Simple and consistent
- Position sizes grow as account grows
- Position sizes shrink after losses (automatic adjustment)
Fixed Dollar Method
Risk the same dollar amount on every trade:
- Easy to calculate and track
- Does not adjust for account growth or decline
- Good for beginners starting out
Kelly Criterion
Mathematically optimal sizing based on win rate and payoff ratio:
- Kelly % = Win Rate - (Loss Rate / Payoff Ratio)
- Often suggests aggressive sizing
- Most traders use half-Kelly or quarter-Kelly for safety
Position Size Calculator Best Practices
Always Calculate Before Trading
Never enter a trade without knowing your position size. Calculate it before you place the order, not after.
Account for Correlation
If you have multiple positions in similar stocks:
- Tech stocks often move together
- Consider total sector exposure
- Multiple 1% risks can become one large risk if correlated
Adjust for Confidence
Some traders vary risk based on setup quality:
- A+ setups: Risk 1.5-2%
- B setups: Risk 1%
- C setups: Risk 0.5% or skip
Warning: Do not let confidence become overconfidence. Even the best setups fail. Stay within your overall risk limits.
Track Your Position Sizing
Pro Trader Dashboard shows your average position size and risk per trade. See if you are staying disciplined with your position sizing rules.
Summary
Position sizing is the foundation of risk management. Use the formula: Position Size = Dollar Risk / Risk Per Share. Never risk more than 1-2% of your account on any single trade. Calculate your position size before every trade, accounting for stop loss distance and volatility. Consistent position sizing keeps you in the game through losing streaks and lets your edge play out over time.
Learn more: How to manage losing trades and profit/loss calculator guide.