You have a $10,000 trading account.
You see a great setup on AAPL. You're confident. This is going to work.
So you buy 100 shares at $175.
You're all in. $17,500 worth of stock.
Wait. You only have $10,000. You used margin. You're leveraged 1.75:1.
AAPL drops 3%. You're down $525.
That's 5.25% of your account. In one trade.
You're scared. You don't want to lose more. You hold.
AAPL drops another 5%. Now you're down $1,475.
That's 14.75% of your account. In two days.
You panic. You sell at the bottom.
Your account is now $8,525.
You lost 14.75% on one trade.
Here's what you didn't know:
You should have risked 1%. $100.
You should have bought 10 shares. Not 100.
If you had sized correctly, that 8% drop would have cost you $80. Not $1,475.
Position sizing is the #1 mistake retail traders make.
It's the fastest way to blow up an account.
Let's fix that.
What Is Position Sizing? (The Simple Definition)
Position sizing is determining HOW MUCH to buy or sell in a trade.
Not what to buy. Not when to buy. HOW MUCH to buy.
Example:
Your account: $10,000 Your risk: 1% = $100 Your stop loss: $5 away from entry
Position size = Risk ÷ Stop distance
Position size = $100 ÷ $5 = 20 shares
You buy 20 shares. Not 10. Not 100. Exactly 20.
Why it matters:
Wrong position sizing = profitable strategy loses money
Right position sizing = losing strategy becomes survivable
Position sizing is your lifeline.
Why Most Traders Get Position Sizing Wrong
Mistake #1: Fixed Dollar Amount
What they do:
"I buy $2,000 worth of stock every trade."
Why it's wrong:
Sometimes that means risking 2%. Sometimes 5%. Sometimes 10%.
Example:
- Trade 1: You buy $2,000. Stop is 2% away. Risk: $40 (0.4%). Good.
- Trade 2: You buy $2,000. Stop is 10% away. Risk: $200 (2%). Bad.
- Trade 3: You buy $2,000. Stop is 0.5% away. Risk: $10 (0.1%). Too small.
Your risk is all over the place.
You're not managing risk. You're gambling.
Mistake #2: Fixed Share Amount
What they do:
"I buy 100 shares every trade."
Why it's wrong:
Different stocks have different prices. Different stops. Different risk.
Example:
- Trade 1: 100 shares of AAPL at $175, stop at $170. Risk: $500 (5%). Dangerous.
- Trade 2: 100 shares of TSLA at $240, stop at $235. Risk: $500 (5%). Dangerous.
- Trade 3: 100 shares of a $50 stock, stop at $48. Risk: $200 (2%). Still too high.
You're risking way too much.
One bad run will wipe you out.
Mistake #3: Percentage of Account
What they do:
"I invest 20% of my account per trade."
Why it's wrong:
This tells you how much to invest. Not how much to risk.
Example:
Your account: $10,000 You invest 20%: $2,000 per trade
Trade 1: Stock at $100, stop at $98. You buy 20 shares. Risk: $40 (0.4%). Good. Trade 2: Stock at $100, stop at $95. You buy 20 shares. Risk: $100 (1%). Okay. Trade 3: Stock at $100, stop at $90. You buy 20 shares. Risk: $200 (2%). Bad.
Same 20% investment. Completely different risk.
Position sizing should be based on risk, not investment.
Mistake #4: Ignoring Volatility
What they do:
They use the same position size for every trade. Regardless of volatility.
Why it's wrong:
High volatility = wide stops = smaller position size needed Low volatility = tight stops = larger position size possible
Example:
- AAPL (low volatility): Stop $3 away. Position size: $100 ÷ $3 = 33 shares.
- TSLA (high volatility): Stop $10 away. Position size: $100 ÷ $10 = 10 shares.
If you buy 33 shares of TSLA with a $10 stop, you're risking $330 (3.3%).
Way too much.
Position size must adjust for volatility.
Mistake #5: Risking Too Much
What they do:
"I'm confident in this trade. I'll risk 5%."
Why it's wrong:
The math doesn't care about your confidence.
Example:
You risk 5% per trade. You lose 10 trades in a row (happens to everyone eventually).
After 10 losses:
Your account is down 40%. Not 50% (compounding).
You need a 67% gain just to get back to breakeven.
If you risked 1%: After 10 losses, you're down 9.5%. You need a 10.5% gain to recover.
Big difference.
1% risk = survivable. 5% risk = dangerous.
The 3 Position Sizing Formulas You Must Know
Formula #1: Fixed Risk Position Sizing (Gold Standard)
The formula:
Position Size = (Account Size × Risk Percentage) ÷ Stop Distance
Example:
- Account: $10,000
- Risk: 1% = $100
- Entry: $175
- Stop: $170
- Stop distance: $5
Position size = $100 ÷ $5 = 20 shares
You buy 20 shares at $175. Total investment: $3,500.
Your maximum loss: $100 (1% of account).
Why it's the best:
- Every trade risks exactly 1%
- No trade can blow up your account
- You can survive long losing streaks
- You stay in the game long enough to win
Formula #2: Volatility-Adjusted Position Sizing (Advanced)
The formula:
Position Size = (Account Size × Risk Percentage) ÷ (ATR × 2)
ATR = Average True Range (volatility measure)
Example:
- Account: $10,000
- Risk: 1% = $100
- Entry: $175
- ATR (14-day): $6
- Stop distance: ATR × 2 = $12
Position size = $100 ÷ $12 = 8 shares
You buy 8 shares at $175. Total investment: $1,400.
Your maximum loss: $96 (0.96% of account).
Why it's powerful:
- Adjusts position size for volatility
- High volatility = smaller position
- Low volatility = larger position
- Keeps risk consistent across different market conditions
Formula #3: Kelly Criterion (Aggressive - Not Recommended)
The formula:
Kelly % = (Win Rate × Avg Win) - (Loss Rate × Avg Loss) ÷ Avg Win
Position Size = Account Size × Kelly %
Example:
Your strategy:
- Win rate: 55%
- Avg win: $200
- Avg loss: $100
Kelly % = (0.55 × $200) - (0.45 × $100) ÷ $200 Kelly % = ($110 - $45) ÷ $200 Kelly % = $65 ÷ $200 = 32.5%
Kelly says you should risk 32.5% per trade.
Why it's dangerous:
- Assumes you know your exact edge (you don't)
- Assumes your edge is stable (it's not)
- One bad run will destroy you
- Even half-Kelly (16%) is too aggressive
My recommendation: Stick to 1% fixed risk.
Kelly is interesting math. Terrible risk management.
How to Calculate Position Size (Step-by-Step)
Step 1: Determine Your Account Size
Your total trading capital.
Example: $10,000
Step 2: Determine Your Risk Percentage
Recommendation: 1%
Not 2%. Not 0.5%. 1%.
Why 1% is perfect:
- You can lose 20 trades in a row and still have 82% of your account
- You can survive normal drawdowns (10-15%)
- You can sleep at night
- You won't be forced to stop trading
Example: $10,000 × 1% = $100 risk per trade
Step 3: Determine Your Stop Loss Level
Based on technical analysis, not arbitrary levels.
Good stop placements:
- Below support for longs
- Above resistance for shorts
- Below/above a swing high/low
- At a Fibonacci level
- At a volatility-based level (2× ATR)
Example: You're going long on AAPL at $175. Support is at $170. Stop at $170.
Step 4: Calculate Stop Distance
Stop Distance = Entry Price - Stop Price (for longs)
Example: $175 - $170 = $5
Step 5: Calculate Position Size
Position Size = Risk Amount ÷ Stop Distance
Example: $100 ÷ $5 = 20 shares
Step 6: Verify Your Risk
Maximum Loss = Position Size × Stop Distance
Example: 20 shares × $5 = $100
$100 is exactly 1% of $10,000. Perfect.
Step 7: Calculate Your Investment
Total Investment = Position Size × Entry Price
Example: 20 shares × $175 = $3,500
You're investing $3,500 (35% of your account) to risk $100 (1% of your account).
That's the power of proper position sizing.
Position Sizing in Action (Real Examples)
Example #1: Low Volatility Stock
Setup: You're going long on AAPL
Your account: $10,000 Your risk: 1% = $100
Trade details:
- Entry: $175
- Stop: $172
- Target: $182
Stop distance: $175 - $172 = $3
Position size: $100 ÷ $3 = 33 shares
Investment: 33 × $175 = $5,775 (57.75% of account)
Risk: 33 × $3 = $99 (0.99% of account)
Reward: 33 × ($182 - $175) = $231 (2.31% of account)
R:R ratio: 2.3:1
You're investing 58% of your account, but only risking 1%.
That's how you trade low volatility.
Example #2: High Volatility Stock
Setup: You're going long on TSLA
Your account: $10,000 Your risk: 1% = $100
Trade details:
- Entry: $240
- Stop: $230
- Target: $260
Stop distance: $240 - $230 = $10
Position size: $100 ÷ $10 = 10 shares
Investment: 10 × $240 = $2,400 (24% of account)
Risk: 10 × $10 = $100 (1% of account)
Reward: 10 × ($260 - $240) = $200 (2% of account)
R:R ratio: 2:1
You're only investing 24% of your account because TSLA is more volatile.
Same 1% risk. Smaller position.
Example #3: Very Tight Stop
Setup: You're going long on META
Your account: $10,000 Your risk: 1% = $100
Trade details:
- Entry: $350
- Stop: $348
- Target: $360
Stop distance: $350 - $348 = $2
Position size: $100 ÷ $2 = 50 shares
Investment: 50 × $350 = $17,500
Wait. That's more than your account.
You need to use margin or reduce position size.
Better approach: Reduce to 0.5% risk.
New risk: $50 New position size: $50 ÷ $2 = 25 shares
Investment: 25 × $350 = $8,750 (87.5% of account)
Risk: 25 × $2 = $50 (0.5% of account)
Reward: 25 × ($360 - $350) = $250 (2.5% of account)
R:R ratio: 5:1
Tight stop = larger position possible.
Wide stop = smaller position required.
The Position Sizing Calculator (You Can Use This)
The Quick Formula
1. Account size: $__________ 2. Risk %: 1% 3. Risk amount: Line 1 × 0.01 = $__________ 4. Entry price: $__________ 5. Stop price: $__________ 6. Stop distance: Line 4 - Line 5 = $__________ 7. Position size: Line 3 ÷ Line 6 = __________ shares
Example:
- Account: $10,000
- Risk: 1%
- Risk amount: $100
- Entry: $175
- Stop: $170
- Stop distance: $5
- Position size: 20 shares
The Spreadsheet Template
Create a spreadsheet with these columns:
| Date | Symbol | Account | Risk % | Risk $ | Entry | Stop | Stop Dist | Position Size | Invest | Risk % | Target | R:R |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1/9 | AAPL | $10,000 | 1% | $100 | $175 | $170 | $5 | 20 | $3,500 | 1% | $182 | 2.3:1 |
Use this for every trade.
It eliminates calculation errors.
It keeps your risk consistent.
Special Position Sizing Situations
Situation #1: Correlated Positions
You're long AAPL, MSFT, and GOOGL.
All three are tech stocks. Highly correlated.
If tech crashes, all three drop together.
How much are you really risking?
Wrong:
Each position: 1% risk Total risk: 1% + 1% + 1% = 3%
Right:
Correlated positions = 1 combined risk Each position: 0.33% risk Total risk: 0.33% + 0.33% + 0.33% = 1%
When trading correlated positions, reduce your risk.
Or limit correlated exposure to 1% total.
Situation #2: Scaling Into Positions
You want to build a position over multiple entries.
Example:
Your full position: 20 shares You'll enter in 4 trades of 5 shares each
Entry 1: 5 shares at $172, stop $170 Entry 2: 5 shares at $174, stop $170 Entry 3: 5 shares at $176, stop $170 Entry 4: 5 shares at $178, stop $170
Average entry: $175 Stop: $170 Total position: 20 shares
If stopped: Loss = 20 × ($175 - $170) = $100 (1% risk)
Why scale in?
- Better average entry
- Confirm the trade is working
- Reduce risk if first entries fail
- Pyramiding profits as trade moves in your favor
Situation #3: Scaling Out of Positions
You want to exit a position in stages.
Example:
Position: 20 shares at $175 Target: $185 (2:1 R:R)
Exit 1: Sell 10 shares at $180 (1:1 R:R) Exit 2: Sell 10 shares at $185 (2:1 R:R)
Why scale out?
- Lock in profits along the way
- Reduce stress as trade progresses
- Avoid regret if you exit too early
- Balance greed with discipline
Situation #4: ATR-Based Position Sizing
You adjust position size based on market volatility.
Formula:
Position Size = (Account × Risk%) ÷ (ATR × 2)
Example 1 (Low volatility):
Stock: AAPL Account: $10,000 Risk: 1% = $100 ATR: $3
Position size = $100 ÷ ($3 × 2) = $100 ÷ $6 = 16 shares
Example 2 (High volatility):
Stock: TSLA Account: $10,000 Risk: 1% = $100 ATR: $12
Position size = $100 ÷ ($12 × 2) = $100 ÷ $24 = 4 shares
High volatility = smaller position. Low volatility = larger position.
Your risk stays consistent.
The Position Sizing Rules You Must Follow
Rule #1: Never Risk More Than 1%
Not 2%. Not 5%. 1%.
Your account depends on it.
Rule #2: Calculate Position Size Before You Enter
Never enter a trade without knowing your position size.
Never guess.
Rule #3: Use Hard Stop Losses
Set your stop in your broker.
Not just on your chart.
Rule #4: Adjust for Volatility
High volatility stocks = smaller positions
Low volatility stocks = larger positions
Rule #5: Respect Correlation
Correlated positions count as one combined risk.
Don't double-count uncorrelated risk.
Rule #6: Recalculate After Account Changes
Your account grows to $12,000?
New 1% risk = $120.
Your account drops to $8,000?
New 1% risk = $80.
Always recalculate.
Rule #7: Never Risk More to Make Back Losses
Down 5% for the month?
Don't increase risk to 2% to "make it back."
Stick to 1%.
The 1% Risk Simulation (What Happens in Real Trading)
Scenario #1: Winning Streak
You win 10 trades in a row.
Each trade: 2% gain (assuming 2:1 R:R)
Starting account: $10,000 After 10 wins: $12,190
Gain: 21.9%
Scenario #2: Losing Streak
You lose 10 trades in a row.
Each trade: 1% loss
Starting account: $10,000 After 10 losses: $9,046
Loss: 9.5%
You're still in the game.
Scenario #3: Realistic Mix
100 trades over 6 months.
- Win rate: 45%
- Average win: 2.2%
- Average loss: 1%
100 trades = 45 wins, 55 losses
Wins: 45 × 2.2% = 99% Losses: 55 × 1% = 55%
Net gain: 99% - 55% = 44%
Starting account: $10,000 After 100 trades: $14,400
Gain: 44% in 6 months
All by risking 1% per trade.
Common Position Sizing Questions
Q: What if my stop is very tight?
A: You can take a larger position. But be careful.
If your stop is $1 and you risk $100: Position size = $100 ÷ $1 = 100 shares
Make sure you can afford the investment.
If 100 shares × $50 stock = $5,000 and you have $10,000, you're fine.
If 100 shares × $200 stock = $20,000 and you have $10,000, you need to reduce position size or use margin (not recommended).
Q: What if my stop is very wide?
A: You must take a smaller position.
If your stop is $20 and you risk $100: Position size = $100 ÷ $20 = 5 shares
That's the only way to keep risk at 1%.
Q: Can I risk 2% on a "sure thing"?
A: No.
There's no such thing as a sure thing in trading.
Every trade is the same. Risk 1%.
Q: Should I reduce risk after losses?
A: No. Stick to 1%.
Unless your account dropped significantly. Then 1% of the new, smaller account is less.
Q: Should I increase risk after wins?
A: No. Stick to 1%.
Unless your account grew significantly. Then 1% of the new, larger account is more.
Q: What about compounding?
A: That's the beauty of 1% risk.
As your account grows, your 1% grows.
Your position sizes automatically increase.
$10,000 account = $100 risk per trade $20,000 account = $200 risk per trade $50,000 account = $500 risk per trade
Compounding happens automatically.
Your Position Sizing Action Plan
This Week:
- Calculate your 1% risk amount
- Create a position sizing spreadsheet
- Practice calculating position sizes (don't trade yet)
This Month:
- Use 1% risk on every trade
- Track your position sizes
- Review your risk consistency
This Quarter:
- Master position sizing
- Experiment with ATR-based sizing
- Track the impact on your account
Key Takeaways
- Position sizing is HOW MUCH to buy, not what to buy - it's the most important risk management tool
- Fixed dollar, fixed shares, and fixed percentage are all wrong - they lead to inconsistent risk
- Use the 1% fixed risk formula - Position Size = (Account × 1%) ÷ Stop Distance
- Every trade risks exactly 1% - no more, no less, no exceptions
- Volatility matters - high volatility = smaller position, low volatility = larger position
- Correlated positions = combined risk - don't double-count correlated trades
- ATR-based sizing adjusts for volatility - Position Size = (Account × 1%) ÷ (ATR × 2)
- Scaling in/out reduces risk and locks in profits - enter and exit in stages
- Never risk more to make back losses - always stick to 1%
- 1% risk lets you survive 10 consecutive losses - your account drops 9.5%, not 50%
- Compounding is automatic - as your account grows, 1% grows with it
- Calculate position size before every trade - never guess, never estimate
Position sizing is not optional.
It's the difference between surviving and blowing up.
It's the difference between a career and a catastrophe.
It's the difference between professional and amateur.
Calculate your position size. Risk exactly 1%. Every trade.
Your account will survive. Your results will improve. Your trading will transform.
ChartMini automatically calculates optimal position sizes based on your account, risk tolerance, and current market volatility so you never risk more than 1% and always have the perfect position size for every trade.