TRADING / PRACTICAL GUIDE
Position Sizing in Trading: Formula and Examples
Position sizing turns a dollar risk limit into a share quantity, instead of picking a quantity first and hoping. A simple formula: divide the amount you are willing to lose by the distance, in price, between your entry and your stop. Real losses can still exceed the plan, because prices can gap past a stop.
In this guide
Decide the loss before you decide the size
It is tempting to decide how many shares "feels right," place the trade, and figure out a stop afterward. That order of operations lets the position size drift with excitement or fear instead of with a fixed limit. Doing it the other way — loss limit first, quantity last — keeps the decision anchored to something you chose while calm.
The formula, step by step
- Set your maximum planned loss: Pick a dollar amount you are willing to lose on this one trade if it goes wrong, fixed in advance and not adjusted mid-trade.
- Find your entry-to-stop distance: Subtract your stop price from your entry price for a long position. This is your estimated risk per share, before costs.
- Divide, then round down: Divide the planned dollar loss by the per-share risk, then round down to a whole number of shares. Rounding up would let a single trade exceed your limit.
- Add room for costs: Commissions and the bid-ask spread are not part of the formula above. Build in a separate allowance rather than treating the raw number as final.
Three worked examples
| Planned risk | Entry price | Stop price | Risk per share | Shares (rounded down) |
|---|---|---|---|---|
| $50 | $22.00 | $20.75 | $1.25 | 40 shares |
| $100 | $58.40 | $56.90 | $1.50 | 66 shares |
| $75 | $9.80 | $9.35 | $0.45 | 166 shares |
In each row, the share count comes from dividing the planned risk by the risk per share and dropping any fraction. Notice the third row: a tighter stop allows more shares for the same dollar risk. The position isn't "bigger" in risk terms — it's just built with a closer exit.
What the formula assumes
Read this before you rely on it: That your stop actually fills at, or very near, the stop price. That assumption breaks down in fast markets, at the open, during news, and around gaps — the real loss can be larger than the planned one.
When the stop is jumped: the third row, revisited
Go back to the third row: 166 shares bought at $9.80 with a stop at $9.35, planned risk $75. Suppose the stock closes at $9.70, then reports bad news overnight and opens at $8.40, about 14% below your entry. The stop triggers at the open, and the order fills near $8.40. The loss is 166 shares times $1.40, or about $232 — more than three times the planned $75.
The first row, with 40 shares at $22.00, faces the same-sized shock differently. A 14% gap takes $22.00 to roughly $18.90, and 40 shares times $3.10 is $124 — well over the $50 plan, but a smaller multiple of it. Tight stops earn you more shares, and more shares make a gap hurt more. The formula is honest about planned risk. It is silent about the unplanned kind.
| Row | Shares | Planned loss | Loss after a 14% gap | Multiple of plan |
|---|---|---|---|---|
| First | 40 | $50 | about $124 | 2.5x |
| Third | 166 | $75 | about $232 | 3.1x |
Where the simple rule needs adjusting
- Short positions: For a short, the risk per share is the stop price minus the entry price, and the gap that hurts is a gap up. The arithmetic is otherwise identical.
- Several positions at once: Three trades each risking $100 can be one $300 bet if they are in the same sector and move together. Count correlated exposure as one position when setting the limit.
- Stops tighter than the spread: If the bid-ask spread is 8 cents and your stop is 12 cents away, normal noise will trigger it. The stop distance needs to be wide enough to mean something in that stock.
- Dollar limit versus percentage: A common alternative is to set the planned loss as a fraction of the account — half a percent, one percent — so the dollar figure shrinks after losses and grows after gains without a separate decision.
- Minimum lots and odd sizes: Some markets and brokers only accept round lots, or price fractional shares differently. Rounding down to the nearest accepted size can leave you well under the planned risk, which is the safe direction to err.
Common mistakes
- Moving the stop to fit the size: Wanting 200 shares and then choosing a stop that makes 200 fit is the formula run backwards. The stop belongs where the trade idea fails, and the size follows.
- Rounding up: Sixty-six point six shares is sixty-six, not sixty-seven. Small, but it is the habit that matters.
- Forgetting the number is per trade: A $100 limit per trade with ten open trades is a $1,000 exposure, before any gap.
- Treating planned risk as maximum risk: The planned figure is what you lose if the stop fills where you placed it. The table above shows what happens when it does not.
What position sizing cannot do
It cannot guarantee a stop executes at the intended price, prevent a security from being halted, or account for a gap between one session's close and the next session's open. It also cannot fix a bad idea — sizing a poor trade smaller only slows down how fast it loses money.
What to do next
Write the formula on a card and keep it next to the order ticket: planned loss, divided by entry minus stop, rounded down. Then do three things before the next trade.
- Fix the planned loss in dollars, or as a fraction of the account, and write it down. It should not change because a setup looks unusually good.
- Check what your broker charges per trade and what the typical spread is in the stocks you trade, and decide how much of the planned loss those costs eat. In a $50 plan, a $2 round trip is 4% before the trade starts.
- Run the gap arithmetic from the table above on your own largest position. If a 14% gap against you would be a number you could not shrug off, the position is too large regardless of where the stop sits.
Sources and further reading
New research into practice: AI and Learning: Can You Explain What It Just Did?.
Continue learning
Educational purpose: This guide provides general education. It does not provide personalised financial, investment, legal or tax advice.