Risk per trade and position sizing
Decide how much you are willing to lose before deciding how much to buy. Size follows from risk, never the other way round.
Two different numbers
Exposure is how much money is in the position (shares × price). Risk is how much you lose if the trade reaches its invalidation point (shares × distance to stop). Beginners confuse them: a $5,000 position with a stop 2% away risks about $100, not $5,000 — unless the price gaps through the stop.
A fixed-fractional rule sets risk as a small percentage of the account, commonly 0.25%-1% for learners. Smaller risk per trade means a losing streak dents the account rather than breaking it.
The sizing formula
Shares = (account × risk %) ÷ (entry − stop) for a long position. Always round down. Then check exposure against a separate cap (for example no more than 20-25% of the account in one position) because a tight stop can produce a huge share count.
The stop comes from where the idea is wrong — a broken level, a failed pattern — not from how much you would like to risk. If the logical stop is far away, the correct answer is fewer shares, not a closer stop.
Worked example
Sizing a $25,000 learning account (synthetic)
- Risk budget: 1% of $25,000 = $250.
- Entry $80.00, invalidation stop $76.00: risk per share = $4.00.
- Shares = $250 ÷ $4.00 = 62.5 → round down to 62 shares.
- Actual risk = 62 × $4.00 = $248. Exposure = 62 × $80 = $4,960 (19.8% of the account) — inside a 25% cap.
Risk budget ÷ risk per share = share count. Then sanity-check exposure.
Common misconceptions
“Risking 1% means I can only lose 1% of my account.”
Only if the stop fills at its price. Gaps and fast markets can turn 1R into 2-4R. Size assuming some slippage.
“High-conviction trades deserve much larger risk.”
Conviction is a feeling, not a measured probability. Variable sizing by feeling is how losing streaks become drawdowns.
Checkpoint