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Position sizing formula

Account × risk% / (entry - stop).

8 min · Beginner · Free lesson

What you'll learn

  • Calculate share size from account size, risk percent, entry and stop
  • Adjust size for buying power limits and expected slippage
  • Calculate option contract size from premium at risk

The idea

Position sizing answers one question: how many shares can I buy so that if my stop is hit, I lose exactly 1R and no more?

Most beginners size by feel ("I'll buy 500 shares") or by dollars ("I'll put $5,000 in"). Both ignore where the stop is. A 500-share position with a $0.10 stop and a 500-share position with a $1.50 stop carry completely different risk. The formula fixes that.

Think of it like mixing medicine. The dose depends on the patient's weight, not on how many pills are in the bottle. Your share count depends on the stop distance, not on how much cash you have.

How it works

The formula:

Shares = (Account x Risk %) / (Entry - Stop)

For a short, use (Stop - Entry). The top of the formula is your 1R in dollars. The bottom is your risk per share.

Step by step:

  1. Dollar risk. Account x Risk %. At 1% on $25,000, that is $250.
  2. Risk per share. The distance from entry to stop. Add a slippage buffer on thin or fast stocks.
  3. Divide and round down. Always round down, never up. Rounding up means risking more than 1R.
  4. Check buying power. Shares x entry must fit within your available buying power. If it does not, cap the size. Never widen or tighten the stop to make the size fit.
  5. Options: Contracts = Dollar risk / (premium at risk per contract x 100). If you plan no stop on the option, the premium at risk is the full price you pay.

Worked example

All trades hypothetical, all at 1% risk.

A. Standard long. Account $25,000. Dollar risk $250. Buy XYZ at $40.00, stop $39.20. Risk per share $0.80.

  • $250 / $0.80 = 312.5, rounded down to 312 shares.
  • Actual risk: 312 x $0.80 = $249.60. Position value: 312 x $40.00 = $12,480.

B. Small-cap with slippage. Account $10,000. Dollar risk $100. Buy XYZ at $2.40, stop $2.25. Risk per share $0.15.

  • $100 / $0.15 = 666.7, so 666 shares.
  • This stock is thin, and stops often slip about $0.03. Using $0.18 as risk per share: $100 / $0.18 = 555.6, so 555 shares. Now a slipped stop still costs about $100: 555 x $0.18 = $99.90.

C. Short. Account $30,000. Dollar risk $300. Short XYZ at $75.00, stop $76.20. Risk per share = $76.20 - $75.00 = $1.20.

  • $300 / $1.20 = 250 shares short. Position value $18,750.

D. Buying power cap. Account $10,000 cash, no margin. Dollar risk $100. Buy XYZ at $100.00, stop $99.60. Risk per share $0.40.

  • Formula says $100 / $0.40 = 250 shares. But 250 x $100 = $25,000, far more than $10,000.
  • Maximum you can buy: $10,000 / $100 = 100 shares. Risk becomes 100 x $0.40 = $40, or 0.4R. That is fine. Taking less than 1R is allowed. Widening the stop to "use" the full $100 is not.

E. Options. Account $20,000. Dollar risk $200. Buy a call at $1.60 and plan to exit if it falls to $1.00.

  • Premium at risk per contract = ($1.60 - $1.00) x 100 = $60.
  • $200 / $60 = 3.33, so 3 contracts. Actual risk $180. Cost 3 x $160 = $480.
  • If you plan to hold to expiration with no stop, risk per contract is the full $160. $200 / $160 = 1.25, so 1 contract.

Common mistakes

  • Rounding up — 312.5 becomes 313 and you are over 1R on every trade — always round down.
  • Moving the stop to fit the size you want — the stop no longer marks where the idea is wrong — the chart sets the stop, the formula sets the size.
  • Forgetting slippage on thin stocks — your -1R becomes -1.4R on a fast drop — add a buffer to risk per share on small caps.
  • Sizing options on the stock's stop — option prices do not move one-for-one with stock — size on the premium you can lose.

Checklist

  • Did I calculate dollar risk as account x risk % (1% or less)?
  • Did I measure risk per share from entry to the chart-based stop?
  • Did I add a slippage buffer if the stock is thin?
  • Did I round down?
  • Does the position fit my buying power?
  • For options, did I size on premium at risk x 100?

Practice: Size every Paper Sim trade by formula

  1. Before your next Paper Sim session, write your account size and 1% dollar risk at the top of your Trade Journal entry.
  2. For each setup, record entry and chart-based stop, then calculate shares with the formula and round down.
  3. Check the position value against your buying power and note any cap.
  4. Place the order with a bracket stop at exactly the planned price.
  5. After the session, ask the AI Coach to check each trade's actual risk against 1R and flag any over-sized trades.

Key takeaways

  • Shares = (Account x Risk %) / (Entry - Stop), always rounded down.
  • The chart sets the stop and the formula sets the size, never the other way around.
  • Add a slippage buffer to risk per share on thin or fast-moving stocks.
  • If buying power caps your size, take the smaller risk rather than changing the stop.
  • Option contracts = dollar risk / (premium at risk x 100).

Glossary

  • Position size — The number of shares or contracts in a trade, calculated so the stop costs no more than 1R.
  • Risk per share — The distance between entry and stop, plus any slippage buffer.
  • Buying power — The maximum dollar value of positions your account can hold, based on cash and any margin.

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