Position sizing is the process of deciding how many shares, lots, contracts, or coins to buy or sell on a given trade. It's not a secondary consideration — it's the core of risk management. The same strategy, executed with correct position sizing, will survive losing streaks. Executed with incorrect sizing, it won't.
The Core Principle
The goal of position sizing is to keep the dollar risk on every trade the same, regardless of instrument, price, or stop loss distance. Whether you're trading a $10 stock or a $1,000 stock, a 10-pip stop or a 50-pip stop, your account should risk the same fixed amount — typically 0.5–2% of account balance.
The Formula
Position size = (Account balance × Risk %) ÷ (Entry price − Stop loss price)
Example: $20,000 account · 1% risk ($200) · Entry $75 · Stop $71 · Risk per share $4 · Position size = $200 ÷ $4 = 50 shares.
Fixed Dollar vs Fixed Percentage Sizing
Fixed dollar sizing (e.g., always risk $200) doesn't adapt as your account grows or shrinks. A $200 risk on a $5,000 account is 4%; on a $50,000 account it's 0.4%. The exposure is inconsistent.
Fixed percentage sizing (e.g., always risk 1%) keeps exposure proportional to account size. After wins, you risk a slightly larger dollar amount. After losses, slightly less — which naturally reduces position size during drawdowns, slowing further losses. This is why percentage-based sizing is the professional standard.
Common Mistakes
Fixed share counts. Buying 100 shares of every stock means your dollar risk varies wildly with price and stop distance. Some trades risk $200; others risk $2,000. There's no consistency.
Reverse-engineering the stop. Deciding how many shares to buy first, then setting the stop wherever it limits the loss to an acceptable number. This means your stop placement is driven by your position size rather than by chart structure — exactly backwards.
Increasing size after losses. Martingale-style doubling up to recover losses faster is how most blown accounts happen. Position sizing should be mechanical, not emotional.