What is Position Sizing?

Position sizing determines how many shares, units or contracts you should trade based on the amount of money you are willing to risk on a trade.

Instead of deciding your quantity first and then accepting whatever loss occurs, position sizing starts with your acceptable risk and works backwards to determine the quantity.

Step 1: Calculate Maximum Risk

First determine how much of your account you are willing to risk on the trade.

Step 2: Calculate Risk Per Share

For a Long trade, the risk per share is the difference between your entry price and stop-loss price.

For a Short trade:

Step 3: Calculate Position Size

Important Risk Management Note

Position sizing does not guarantee a profit or prevent losses. It is a risk-management method used to help control the amount that may be lost if the stop-loss is reached.

Actual execution prices may differ from the planned entry or stop-loss because of market movement, slippage, liquidity, gaps and other trading conditions.