What is position sizing?
Definition
Position sizing is deciding how large a position to take so that, if the trade hits its stop, the loss equals a fixed amount you chose in advance.
Position sizing works backward from risk. You decide the most you are willing to lose on a trade (for example 1% of the account), find the price where your thesis is wrong, and let the distance between entry and stop set the size.
Formula: position size = amount at risk ÷ (entry price − stop price) for a long position.
A trader risking $500 with an entry at $100 and a stop at $95 can hold 100 units ($10,000 of exposure), because a $5 move against them costs exactly $500. Move the stop to $90 and the same risk allows only 50 units.
Most accounts are not broken by bad ideas. They are broken by good ideas sized too large. Try the numbers in our position size calculator.
Related terms
General education only. Not financial advice.