Position Sizing Explained

The short answer

Position size is not a decision. It is the output of three inputs you have already decided: how much of the account you will risk, where you enter, and where the idea is wrong.

Fix those three and the size is arithmetic. Change the size afterwards and you have quietly changed the risk.

The formula

amount at risk = account equity × risk % ÷ 100
risk per unit  = |entry price − stop price|
position size  = amount at risk ÷ risk per unit
notional       = position size × entry price

Four lines. That is the whole method, and the position size calculator is simply these four lines with input validation attached.

A worked example

The numbers below are invented for teaching. They describe no real instrument and are not a trade idea.

• Account equity: $10,000
• Risk per trade: 1% → $100
• Entry: $50.00
• Stop: $48.00

Risk per unit is $2.00. Position size is $100 ÷ $2.00 = 50 units. Notional exposure is 50 × $50 = $2,500, which is 25% of the account.

Note the two different numbers. $2,500 is what you control. $100 is what you can lose if the stop does the job. People conflate these constantly, usually in a direction that flatters the position.

Wider stop, smaller size

Change one input. Same account, same 1% risk, same entry at $50 — but now the level that invalidates the idea sits at $45.

Risk per unit becomes $5.00. Position size becomes $100 ÷ $5.00 = 20 units. Notional drops to $1,000.

The stop moved 150% further away and the position shrank by 60%. Total risk is unchanged at $100.

This relationship is the useful part of the formula, because it removes a false dilemma. Traders often feel forced to choose between a stop wide enough to survive normal noise and a position large enough to matter. There is no conflict: widen the stop and reduce the size. The risk is identical. What changes is how much room the idea has to breathe — which is a question about the market, not about your account.

Notional, capital and leverage

Three numbers that get confused:

• Position size — how many units you hold.
• Notional exposure — units × price. The face value of what you control.
• Capital at risk — what you lose if the stop fills as planned.

Leverage enters when notional exceeds your account equity. In the first example, notional of $2,500 against $10,000 equity is 0.25× — no leverage. If the same $100 risk had produced a $30,000 notional, that is 3× leverage, and now a 3.3% adverse move in the underlying wipes out the account balance regardless of where you placed your stop.

The sizing formula does not warn you about this. It happily returns a number that implies leverage you may not intend. That is why the calculator on this site also displays the notional-to-equity ratio: it is the number that tells you whether the position is a normal one or a leveraged one.

What the formula assumes

Four assumptions, each of which can fail:

1. The stop fills at the stop price. Gaps, halts and thin liquidity break this. Your realised loss can exceed the planned loss — see how orders work.
2. Fees are zero. They are not. A round trip adds cost on both sides, so the real loss is the stop loss plus fees. Estimate it with the fee calculator.
3. This is your only position. If you hold correlated positions, your true exposure is the aggregate, not the individual.
4. Equity is current. Sizing off a high-water mark after a drawdown means you are risking a larger percentage of what you actually have.

None of these invalidate the method. They are the reason the output is a planned loss rather than a guaranteed one, and the reason the per-trade percentage should be conservative enough to absorb the occasional case where the plan does not hold.

The habit to build

Size last, not first.

Decide the idea. Decide where it is wrong. Then let the arithmetic tell you the size. The moment the sequence runs the other way — picking a size that feels right and then finding a stop that accommodates it — the risk limit has become decorative.