Position sizing: the formula that sets your trade size
How to calculate position size from account risk and stop distance, with a step-by-step worked example and common mistakes to avoid.
Once you know how much you are willing to lose on a trade, you need to work out how much to buy. This is called position sizing. It is simple math, and it is the step most beginners skip.
The formula
Position size (units) = money at risk ÷ risk per unit
- Money at risk is your account size times your risk percentage.
- Risk per unit is the distance between your entry price and your stop-loss price.
- Account size: 10,000.
- Risk per trade: 1%, so money at risk = 10,000 × 0.01 = 100.
- Entry price: 50. Stop-loss: 47.50.
- Risk per unit: 50 − 47.50 = 2.50.
- Position size: 100 ÷ 2.50 = 40 units.
The position is worth 40 × 50 = 2,000, which is 20% of the account. But if the stop is hit, you lose 40 × 2.50 = 100, exactly 1%. The position value and the risk are two different numbers.
The stop decides the size, not the other way around
The right order is: first find a logical stop-loss level based on the chart, then calculate the size. If the logical stop is further away, the position must be smaller.
| Entry | Stop | Risk per unit | Size for 100 risk | Position value |
|---|---|---|---|---|
| 50 | 47.50 | 2.50 | 40 units | 2,000 |
| 50 | 45 | 5 | 20 units | 1,000 |
| 50 | 49 | 1 | 100 units | 5,000 |
In every row, the loss at the stop is the same 100. Only the number of units changes.
Allow for fees and slippage
Real trades cost fees, and stop orders can fill at a worse price than planned, which is called slippage. In fast markets, slippage can be large. A simple safety habit is to round your size down, or to plan with slightly less than your full risk amount.
Common mistakes
- Choosing the size first ("I'll buy 5,000 worth") and placing the stop wherever it fits.
- Moving the stop further away after entering, which secretly raises your risk.
- Very tight stops that make the position huge. If your calculation says to put most of your account into one trade, step back and consider a smaller position or skipping the trade.
A stop-loss is not a guarantee. If the price gaps or crashes past your stop, the loss can be bigger than planned. That is one more reason to keep the risk per trade small.
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