The one formula you need
Shares = (Account × Risk %) ÷ (Entry − Stop)
That's the whole thing. Memorize it.
The numerator is your dollar risk — the most you're willing to lose on this trade. The denominator is your distance to stop — how many dollars per share you'll lose if you're wrong. Divide them and you get share count.
A worked example
Let's say:
- Account: $10,000
- Risk per trade: 1% = $100
- Entry: $50.00
- Stop: $48.50
Distance to stop = $50.00 − $48.50 = $1.50 per share.
Shares = $100 ÷ $1.50 = 66 shares.
Position cost = 66 × $50 = $3,300. That's 33% of your account in capital deployed — but your actual risk is still just $100 because of where the stop is. Capital deployed and risk taken are not the same thing. This is the insight most beginners miss.
Why beginners size too large
New traders think in dollars-deployed instead of dollars-at-risk. They open a $5,000 position with no stop, ride it down 20%, and lose $1,000 — 10% of the account on one trade. That's a career-killer.
By sizing off your stop instead of your gut, you make every trade survivable. Even a 5-loss streak is just 5% — recoverable in a few good trades.
Before every trade, ask: "If this hits my stop, do I lose more than 1% of my account?" If the answer is yes, you're too big — cut shares until the math works. The setup will still be there at the right size.
The three sizing models
1. Fixed-fractional (recommended for most traders)
Risk a fixed percentage of current account on every trade — typically 0.5% to 1%. Position size shrinks during drawdowns and grows as the account grows. Mathematically optimal for compounding while protecting capital.
2. Fixed-dollar
Risk the same dollar amount on every trade — say $100. Simple to compute. Downside: as your account grows, your risk % shrinks; during drawdowns it grows. Acceptable for small accounts under $5,000 where percentage math gets weird.
3. Volatility-based (ATR)
Use the stock's average true range (ATR) to set the stop, then size from that. Naturally adjusts position size for how volatile the stock is. A choppy stock gets a wider stop and fewer shares; a tame stock gets a tighter stop and more shares. More advanced — implement once you've nailed fixed-fractional.
Position sizing for options
Options are more complex because the contract has leverage built in. The simplest approach: treat the full premium paid as your max loss (which it usually is for long options), then size so that premium is no more than 1–2% of your account.
If you have a $10,000 account and an option costs $250 per contract, one contract is 2.5% — already at the upper limit. That's why responsible options traders trade fewer contracts than beginners think they should. Read the options basics lesson for the full picture.
Common mistakes
- Sizing by "what feels right." Feelings are not a strategy. Use the formula.
- Moving your stop to fit a bigger size. If you have to widen the stop to take a big position, the position is too big.
- Adding to losers. Averaging down doubles your risk on a thesis the market is already disagreeing with. Add to winners, not losers.
- Forgetting commissions and slippage. On small accounts, $1 round-trip commission on a 10-share trade is a real drag. Factor it in.
Practice this
Open the position sizer and run through 10 hypothetical trades with different setups. Within a week, you'll do the math in your head before placing any order. Then move to the trading simulator where the journal forces you to set stop and target on every entry — making the sizing math automatic.