Position sizing is the most important aspect of trading that most traders ignore. You can have the best entries in the world, but if your position sizes are wrong, you will either blow up your account or leave money on the table. This guide will teach you how to size your swing trades correctly.
Why Position Sizing Matters
Position sizing determines how much of your account you put into each trade. Get it wrong, and a few bad trades can devastate your account. Get it right, and you can survive losing streaks while maximizing gains on winners.
The key insight: Professional traders think in terms of risk per trade, not share quantity or dollar amounts. They ask "How much can I lose?" before they ask "How much can I make?"
The Fixed Percentage Risk Method
This is the most widely used position sizing method among professional traders. You risk a fixed percentage of your account on each trade.
How It Works
- Decide on your risk percentage per trade (typically 1-2%)
- Calculate the dollar amount you can risk
- Determine your stop loss distance
- Calculate position size based on these numbers
Position Sizing Formula
Position Size = Account Risk / Trade Risk
Where:
- Account Risk = Account Size x Risk Percentage
- Trade Risk = Entry Price - Stop Loss Price
Step-by-Step Example
Let us walk through a complete position sizing calculation.
Example Calculation
Given:
- Account size: $50,000
- Risk per trade: 1%
- Stock price: $100
- Stop loss: $95
Step 1: Calculate account risk
$50,000 x 1% = $500 maximum risk
Step 2: Calculate trade risk per share
$100 - $95 = $5 risk per share
Step 3: Calculate position size
$500 / $5 = 100 shares
Result: Buy 100 shares at $100 with stop at $95. Total position value is $10,000. If stopped out, you lose $500 (1% of account).
Choosing Your Risk Percentage
The right risk percentage depends on your experience, strategy, and risk tolerance.
Conservative (0.5-1%)
- Best for beginners learning the markets
- Appropriate for volatile trading strategies
- Allows you to survive long losing streaks
- Slower account growth but much safer
Moderate (1-2%)
- Standard for experienced swing traders
- Balances growth potential with risk control
- Can handle 5-10 losing trades in a row
- Most common professional recommendation
Aggressive (2-3%)
- Only for very experienced traders
- Requires high win rate and strict discipline
- Faster growth but higher drawdowns
- Not recommended for most traders
Reality check: At 2% risk per trade, ten consecutive losses would reduce your account by about 18%. At 5% risk per trade, the same losing streak would cost you 40% of your account. This is why lower risk percentages matter.
Volatility-Based Position Sizing
Not all stocks move the same amount. A volatile biotech stock moves more than a stable utility company. Volatility-based sizing adjusts for this difference.
Using ATR for Position Sizing
Average True Range (ATR) measures how much a stock typically moves. You can use it to set stops and size positions consistently.
ATR-Based Sizing Example
Given:
- Account size: $50,000
- Risk per trade: 1% ($500)
- Stock A price: $50, ATR: $2 (4% of price)
- Stock B price: $50, ATR: $5 (10% of price)
Using 2 ATR stop loss:
Stock A: $500 / ($2 x 2) = 125 shares ($6,250 position)
Stock B: $500 / ($5 x 2) = 50 shares ($2,500 position)
Result: The more volatile stock gets a smaller position size, keeping your dollar risk equal.
Portfolio Heat
Portfolio heat is the total risk across all your open positions. Even with proper individual position sizing, too many positions create excessive total risk.
Maximum Portfolio Heat
- Conservative: 5-6% total portfolio risk
- Moderate: 8-10% total portfolio risk
- Aggressive: 12-15% total portfolio risk
Portfolio Heat Example
You have a $50,000 account with a 6% maximum portfolio heat rule.
Maximum total risk = $50,000 x 6% = $3,000
If you risk 1% per trade ($500), you can have a maximum of 6 open positions.
If you already have 4 positions open (risking $2,000), you can only risk $1,000 more on new trades.
Adjusting Position Size for Confidence
Some traders adjust position size based on setup quality. High-conviction trades get slightly larger sizes; lower-conviction trades get smaller sizes.
Tiered Position Sizing
- A+ setups: Full position size (1.5-2% risk)
- A setups: Standard size (1% risk)
- B setups: Half size (0.5% risk)
Warning: Be careful with this approach. Most traders think every trade is an A+ setup. Track your results to see if your confidence levels actually correlate with performance.
Position Sizing Mistakes to Avoid
These errors destroy trading accounts. Make sure you are not making them.
Mistake 1: Sizing by Feel
Deciding position size based on how confident you feel leads to oversized positions on trades that often fail. Use a formula every time.
Mistake 2: Ignoring Stop Loss in Sizing
Buying a fixed number of shares regardless of where your stop is creates inconsistent risk. Your position size should always be calculated from your stop loss.
Mistake 3: Revenge Sizing
After a loss, some traders double their next position to "make it back." This usually leads to larger losses and emotional trading.
Mistake 4: Not Reducing Size in Drawdowns
If your account is down significantly, your position sizes should automatically decrease because you are calculating from a smaller account.
Position Sizing Quick Reference
Use this table as a quick reference for position sizing at different risk levels.
Position Size Table ($50,000 Account)
| Stop Distance | 0.5% Risk | 1% Risk | 2% Risk |
|---|---|---|---|
| $2 | 125 shares | 250 shares | 500 shares |
| $3 | 83 shares | 167 shares | 333 shares |
| $5 | 50 shares | 100 shares | 200 shares |
| $10 | 25 shares | 50 shares | 100 shares |
Track Your Position Sizing Performance
Pro Trader Dashboard automatically calculates your risk per trade and shows how well you are following your position sizing rules.
Summary
Position sizing is the foundation of risk management. Use the fixed percentage method to calculate position size from your account risk and stop loss distance. Keep total portfolio heat under control. Adjust sizes based on volatility when needed. Most importantly, use a formula for every trade instead of sizing by feel.
Now that you understand position sizing, learn about risk-reward ratios to ensure your trades are worth taking, or start keeping a trading journal to track your performance.