How position sizing works
Position sizing works backwards from your stop loss. First you decide the most you're willing to lose on this trade. Then you look at how far your stop is from your entry. Divide one by the other, and you have the number of shares or coins to buy.
Risk per share = entry price − stop loss
Position size = dollar risk ÷ risk per share
Notice what's missing: how confident you feel. A wide stop means fewer shares; a tight stop means more. Either way, if the stop is hit you lose the same planned amount. That consistency is what keeps one bad trade from wrecking an account.
Worked example
You have a $10,000 account and risk 1% per trade. You want to buy a stock at $50 with a stop loss at $47.50 and a target at $57.50.
| Dollar risk (1% of $10,000) | $100.00 |
| Risk per share ($50 − $47.50) | $2.50 |
| Position size ($100 ÷ $2.50) | 40 shares |
| Position value (40 × $50) | $2,000 (20% of account) |
| Profit at target (40 × $7.50) | $300 (3:1 reward:risk) |
If the stock falls to $47.50 you lose $100, exactly 1%. If it reaches $57.50 you make $300. As plain arithmetic: if one trade like this in three reached its target and the other two hit their stops, that would net $100 ($300 − $200) before fees and slippage. Real results differ, and gaps can make a loss bigger than planned.
Why not just buy a round number of shares?
Buying “100 shares” or “$1,000 worth” every time lets the stop distance decide how much you lose. A trade with a stop 2% away and one with a stop 15% away would risk wildly different amounts. Sizing from the stop makes every trade risk the same, so your results reflect how well you pick trades, not how lucky your position sizes were.
Frequently asked questions
How do I calculate position size?
Multiply your account size by the percentage you're willing to risk to get your dollar risk. Subtract your stop loss from your entry price to get the risk per share. Divide the dollar risk by the risk per share. The answer is how many shares to buy.
How much should I risk per trade?
Many traders risk between 0.5% and 2% of their account on a single trade. At 1%, it takes a long losing streak to do serious damage. At 5% or more, a normal run of losses can cut an account in half. The right number depends on you; the point is to pick one and use it every time.
Does position size change with the stop loss?
Yes, and it should. A wider stop means fewer shares; a tighter stop means more. Either way you lose the same planned amount if the stop is hit. Put the stop where the trade idea is proven wrong, then let the size follow from it, not the other way round.
Does this work for crypto?
Yes. Switch to fractional units and the calculator sizes to six decimal places, so you can buy part of a coin. The maths is the same for stocks, ETFs and crypto.
Can I lose more than my planned risk?
Yes. A stop order only limits your loss if it fills near your price. Overnight gaps, fast markets and fees can make a real loss bigger than planned. Stocks that report earnings or news while you hold them are the usual cause, which is why some traders avoid holding through them.
What is reward:risk?
It compares what you stand to make at your target with what you lose at your stop. A $7.50 target move against a $2.50 stop is 3:1. At 3:1 the arithmetic breaks even if one trade in four reaches its target, before fees and slippage; real costs and gaps push that higher. Many traders won't take a trade below 2:1.