Why Position Size Matters
Position sizing is one of the most critical aspects of trading. It determines how many shares or contracts to trade based on your account size and risk tolerance. Proper position sizing protects your capital and ensures you can survive losing streaks. Many traders fail because they risk too much per trade.
The Position Size Formula
Position Size = (Account Risk % x Account Size) / Trade Risk. Account Risk: Percentage of account you're willing to lose (typically 1-2%). Trade Risk: Difference between entry and stop-loss price. Example: $50,000 account, 2% risk, Entry $50, Stop $45. Position Size = ($50,000 x 0.02) / $5 = 200 shares.
Risk Management Rules
Never risk more than 1-2% per trade. Adjust position size based on stop distance. Wider stops = smaller position. Tighter stops = larger position. Always use stop-loss orders. Consider correlation between positions (don't risk 2% on 5 similar trades). Reduce size during drawdowns.
The 1% Rule Explained
With 1% risk per trade: Can survive 100 consecutive losses. 10 losses in a row = 10% drawdown (recoverable). With 5% risk per trade: 10 losses in a row = 50% drawdown (need 100% gain to recover). With 10% risk: 10 losses = wiped out. Risk management is survival.
Key Takeaways
Position sizing controls risk, not returns. 1-2% risk per trade is the golden rule. Calculate before every trade. Adjust for volatility. Never risk more than you can afford to lose. Size management is more important than entry timing. Use our Position Size Calculator.