The difference between amateurs and professionals? Position sizing.
Most traders focus on entries and exits, but the real edge comes from how much you trade. Position sizing is the foundation of risk management. Without it, even the best setups can destroy your account.
If you're risking 5% per trade, you only need 20 losing trades to blow up. But if you risk 1%, you can survive 100 losses in a row. That's the power of proper position sizing.
💰 What Is Position Sizing?
Position sizing is the process of determining how many shares, contracts, or units to trade based on:
- Your account size
- Your risk tolerance (usually 1-2% per trade)
- The distance to your stop loss
It's not about how much you want to make. It's about how much you're willing to lose.
🔢 The Position Size Formula
Here's the math that professional traders use:
- Dollar Risk = Account Size × (Risk % ÷ 100)
- Risk Per Unit = |Entry Price - Stop Loss Price|
- Position Size = (Dollar Risk - Commissions) ÷ Risk Per Unit
Simple, right? But most traders skip this calculation and just "feel" their way into positions. That's a recipe for inconsistency.
⚠️ Why Position Sizing Matters
Without proper position sizing, you'll:
- Risk too much on some trades and too little on others
- Blow up your account after a few bad trades
- Make emotional decisions about trade size
- Struggle to track your actual performance
With consistent position sizing, you:
- Know exactly how much you're risking every time
- Can survive losing streaks
- Make objective decisions based on math, not emotion
- Build a track record you can actually analyze
🛠️ How to Use a Position Size Calculator
I've built a free position size calculator that does all the math for you. Here's how to use it:
- Enter your account size: Your total trading capital
- Set your risk percentage: Typically 1-2% for most traders
- Enter your entry price: Where you plan to enter
- Enter your stop loss: Where you'll exit if wrong
- Add commissions/fees (optional): Don't forget trading costs
The calculator instantly shows you:
- Your dollar risk
- Risk per unit
- Optimal position size
- Total position value
📊 Real-World Example
Let's say you have a $10,000 account and want to risk 1%:
- Dollar Risk: $100
- Entry Price: $50
- Stop Loss: $48
- Risk Per Share: $2
- Position Size: 50 shares
- Position Value: $2,500
Notice how you're only risking $100, but controlling $2,500 worth of stock. That's the power of position sizing. You can trade larger positions while keeping risk small.
🧠 Common Position Sizing Mistakes
Mistake #1: Risking too much per trade
- Many beginners risk 5-10% per trade
- This means 10-20 losses can wipe you out
- Fix: Stick to 1-2% maximum
Mistake #2: Ignoring commissions
- High-frequency traders especially need to account for fees
- Commissions reduce your available risk capital
- Fix: Always subtract fees from your dollar risk
Mistake #3: Inconsistent sizing
- Changing your risk percentage from trade to trade
- Makes it impossible to track performance
- Fix: Pick a percentage and stick with it
Mistake #4: Not adjusting for volatility
- Tight stops require smaller positions
- Wide stops allow larger positions
- Fix: Let the math determine size, not your gut
✅ Position Sizing Best Practices
- Always calculate before entering: Never guess your position size
- Use the same risk percentage: Consistency is key
- Account for commissions: Especially if you trade frequently
- Round down, not up: It's safer to trade slightly less
- Recalculate if you move your stop: Position size changes with stop placement
🎯 The Bottom Line
Position sizing isn't sexy, but it's what separates profitable traders from the rest. You can have the best entry strategy in the world, but if you're sizing positions wrong, you'll still lose money.
The good news? It's a skill you can master in minutes. Use a position size calculator to do the math for you, and focus on being consistent.
Trade smart,
– PatrickWS
