You have two traders. Same strategy. Same market. Same timeframe.
Trader A:
- Account: $10,000
- Win rate: 55%
- Average win: $500
- Average loss: $300
- Results: Broke within 3 months
Trader B:
- Account: $10,000
- Win rate: 55%
- Average win: $500
- Average loss: $300
- Results: $35,000 in 3 months
Same strategy. Same win rate. Same trades.
Drastically different results.
Why?
Trader A sized positions based on feelings.
- "I feel good about this trade" → Large position
- "This one looks risky" → Small position
- "I need to make back my losses" → Huge position
- "I'm on a winning streak" → Maximum position
Trader B sized positions based on math.
- Every trade: 1% risk
- No exceptions
- No emotions
- Consistent sizing
Position sizing is the difference between gambling and trading.
Most traders ignore it. That's why most traders fail.
Let me show you how to master position sizing.
What Is Position Sizing? (The Simple Definition)
Position Sizing = How many shares/contracts to trade based on your account size and risk tolerance.
Think of it like this:
- Wrong way: "I'll buy 100 shares because that feels right" (emotion-based)
- Right way: "I'll buy 75 shares because that limits my risk to 1%" (math-based)
Position sizing answers:
- How much to buy/sell?
- How much to risk?
- How to size for multiple positions?
Position sizing determines:
- Your drawdowns
- Your volatility
- Your psychological comfort
- Your long-term survival
You can have the best strategy in the world. But if your position sizing is wrong, you'll still lose.
Why Most Traders Suck at Position Sizing
Mistake #1: Fixed Dollar Amount
You buy 100 shares every trade.
Sometimes you risk 2%. Sometimes 5%. Sometimes 10%.
Example:
Trade 1: Buy 100 shares AAPL at $180, stop $175
- Risk: $5 × 100 = $500
- Account: $10,000
- Risk: 5%
Trade 2: Buy 100 shares TSLA at $240, stop $230
- Risk: $10 × 100 = $1,000
- Account: $10,000
- Risk: 10%
Same share count. Completely different risk.
One bad streak and you're wiped out.
Mistake #2: Percentage of Account
You invest 50% of your account per trade.
You think: "I'm only risking half my account. That's conservative."
Reality: Risk depends on stop distance, not position size.
Example:
Account: $10,000
Trade 1: Buy $5,000 worth of stock (50%)
- Entry: $100, Stop: $95
- Risk: 5% of position = $250
- Account risk: 2.5% ✓
Trade 2: Buy $5,000 worth of stock (50%)
- Entry: $100, Stop: $85
- Risk: 15% of position = $750
- Account risk: 7.5% ✗
Same 50% allocation. Risk triples based on stop.
Disastrous.
Mistake #3: Martingale Sizing
You lose. You double size. You lose again. You double again.
Example:
Trade 1: Risk $100. Lose. Trade 2: Risk $200. Lose. Trade 3: Risk $400. Lose. Trade 4: Risk $800. Lose.
Total loss: $1,900 on $10,000 account. One bad streak = 19% loss.
Eventually, you'll hit a streak that wipes you out.
Guaranteed blowup.
Mistake #4: Risking Too Much
You risk 5-10% per trade.
You think: "I need big wins to grow fast."
Reality: You're setting yourself up for disaster.
Example:
Account: $10,000 Risk per trade: 10%
5-loss streak (common):
- Trade 1: Lose $1,000 → $9,000
- Trade 2: Lose $900 → $8,100
- Trade 3: Lose $810 → $7,290
- Trade 4: Lose $729 → $6,561
- Trade 5: Lose $656 → $5,905
Result: 41% loss in 5 trades.
You need a 70% gain just to get back to breakeven.
Psychological damage. Account damage.
Mistake #5: Risking Too Little
You risk 0.1% per trade.
You think: "I'm being safe."
Reality: You'll never grow. Commissions will eat you alive.
Example:
Account: $10,000 Risk per trade: 0.1% = $10
Win rate: 55% Average R:R: 2:1
Expected value per trade: (0.55 × $20) - (0.45 × $10) = $11 - $4.50 = $6.50
Make 100 trades/year. Profit: $650.
Return: 6.5%.
Inflation beats you. Commissions beat you.
Pointless.
The Fixed Ratio Position Sizing Formula
The professional standard. Simple. Mathematical. Consistent.
The Formula
Position Size = (Account × Risk%) / (Entry - Stop)
Where:
- Account = Your total account value
- Risk% = Percentage you're willing to risk (usually 1-2%)
- Entry = Your entry price
- Stop = Your stop loss price
Example #1: Long Stock
Account: $10,000 Risk: 1% = $100
Trade:
- Entry: $180
- Stop: $175
- Risk per share: $5
Position size: $100 / $5 = 20 shares
Check: 20 shares × $5 risk = $100 (1% of account) ✓
Example #2: Short Stock
Account: $25,000 Risk: 1% = $250
Trade:
- Entry: $240 (short)
- Stop: $250
- Risk per share: $10
Position size: $250 / $10 = 25 shares
Check: 25 shares × $10 risk = $250 (1% of account) ✓
Example #3: Futures
Account: $50,000 Risk: 1% = $500
Trade:
- ES contract at 4500
- Stop: 4480
- Risk per contract: 20 points × $50 = $1,000
Position size: $500 / $1,000 = 0.5 contracts
Action: Trade 1 contract, risk 2% instead Or: Don't trade (risk too high for your plan)
Example #4: Options
Account: $15,000 Risk: 1% = $150
Trade:
- Buy option at $5.00
- Stop: $2.50
- Risk per contract: $2.50
Position size: $150 / $2.50 = 60 contracts
Check: 60 × $2.50 = $150 (1% of account) ✓
The 3 Position Sizing Models
Model #1: Fixed Risk (Recommended)
Risk the same percentage every trade.
Typical: 1% per trade
Pros:
- Consistent risk
- Predictable drawdowns
- Easy to calculate
- Emotion-free
Cons:
- Doesn't scale with conviction
- Doesn't adapt to volatility
Best for: Most traders
Example:
Account: $20,000 Risk: 1% = $200 per trade
Trade 1: Risk $200 Trade 2: Risk $200 Trade 3: Risk $200
Every trade. Every time. No exceptions.
Model #2: Volatility-Adjusted Risk
Risk less when volatility is high. Risk more when volatility is low.
Formula:
Risk% = Base Risk% / (Current ATR / 50-day ATR)
Example:
Base risk: 1% Current ATR: $4 50-day ATR: $2
Risk%: 1% / ($4 / $2) = 1% / 2 = 0.5%
Trade with 0.5% risk instead of 1%.
Pros:
- Adapts to market conditions
- Reduces risk in volatile periods
- Increases risk in calm periods
Cons:
- More complex
- Requires ATR calculation
Best for: Advanced traders
Model #3: Confidence-Adjusted Risk
Risk more on high-conviction setups. Risk less on low-conviction.
Scale:
- Low conviction: 0.5% risk
- Medium conviction: 1% risk
- High conviction: 1.5% risk
Warning: Dangerous. Requires accurate self-assessment.
Pros:
- Maximizes edge on best setups
- Reduces exposure on weak setups
Cons:
- Subjective
- Easy to fool yourself
- Can lead to inconsistent sizing
Best for: Experienced traders with proven edge
Position Sizing for Multiple Positions
Scenario: Trading 3 Stocks at Once
Account: $50,000 Total risk: 1% = $500
Option #1: Equal Risk
- Stock A: $166 risk (0.33%)
- Stock B: $166 risk (0.33%)
- Stock C: $168 risk (0.34%)
- Total: $500 (1%)
Option #2: Weighted Risk
- Stock A (high conviction): $250 risk (0.5%)
- Stock B (medium): $150 risk (0.3%)
- Stock C (low): $100 risk (0.2%)
- Total: $500 (1%)
Rule: Total risk never exceeds 1-2% of account.
Scenario: Scaling In/Out
Scaling in (building position):
Trade: AAPL at $180
Entry 1: 50 shares at $180 Entry 2: 50 shares at $182 Entry 3: 50 shares at $184
Total: 150 shares, avg entry $182
Stop for entire position: $178
Risk: 150 × ($182 - $178) = $600
Check: Does this fit your 1% risk rule?
Scaling out (taking profits):
Trade: Long 100 shares at $180, stop $175
Target 1: Sell 50 shares at $185 Target 2: Sell 50 shares at $190
First half: +$5 × 50 = $250 profit Second half: +$10 × 50 = $500 profit Total: $750 profit
Adjusted risk: If stopped at $175:
- First half: +$250 (already closed)
- Second half: -$5 × 50 = -$250
- Net: Breakeven
The Kelly Criterion (Advanced Position Sizing)
Kelly Criterion = Mathematical optimal position sizing.
Formula:
f = (bp - q) / b*
Where:
- f* = Fraction of bankroll to wager
- b = Odds received (win/loss ratio)
- p = Probability of winning
- q = Probability of losing (1 - p)
Example
Your system:
- Win rate: 55% (p = 0.55)
- Average win: $500
- Average loss: $300
- Win/loss ratio: 500/300 = 1.67 (b = 1.67)
Kelly calculation:
f = (1.67 × 0.55 - 0.45) / 1.67* f = (0.9185 - 0.45) / 1.67* f = 0.4685 / 1.67* f = 0.28*
Kelly says: Risk 28% per trade.
Reality: This will blow you up.
Why Kelly fails in trading:
- Assumes you know your exact edge (you don't)
- Assumes independent bets (markets have streaks)
- Assumes infinite trials (you have finite capital)
- Volatility is brutal at high Kelly bets
Practical Kelly: Half Kelly or Quarter Kelly
Half Kelly: 28% / 2 = 14% (still too high) Quarter Kelly: 28% / 4 = 7% (better, but still aggressive)
My recommendation: Ignore Kelly. Use 1% fixed risk.
Position Sizing by Account Size
Small Account ($1,000 - $10,000)
Challenge: Can't diversify. Commissions hurt.
Strategy:
- Risk 1% per trade
- Trade fewer positions
- Focus on best setups only
- Use high R:R (3:1+) to maximize gains
Example:
Account: $5,000 Risk: 1% = $50 per trade
Trade: Entry $100, stop $95 (risk $5/share) Position size: $50 / $5 = 10 shares
Commissions: $10 total Effective risk: ($50 + $10) / $5,000 = 1.2%
Still workable.
Medium Account ($10,000 - $50,000)
Opportunity: Can diversify. Commissions less impactful.
Strategy:
- Risk 1% per trade
- Hold 3-5 positions max
- Scale into best setups
- Mix timeframes (intraday + swing)
Example:
Account: $25,000 Risk: 1% = $250 per trade
5 positions:
- Position 1: $250 risk
- Position 2: $250 risk
- Position 3: $250 risk
- Position 4: $250 risk
- Position 5: $250 risk
- Total: $1,250 (5% total risk)
Comfortable diversification.
Large Account ($50,000+)
Opportunity: Full diversification. Multiple strategies.
Strategy:
- Risk 0.5-1% per trade
- Hold 5-10 positions
- Allocate across sectors
- Mix strategies (trend, mean reversion, momentum)
Example:
Account: $100,000 Risk: 0.5% = $500 per trade
10 positions across 5 sectors:
- Tech: 2 positions, $1,000 total risk
- Finance: 2 positions, $1,000 total risk
- Healthcare: 2 positions, $1,000 total risk
- Energy: 2 positions, $1,000 total risk
- Consumer: 2 positions, $1,000 total risk
- Total: $5,000 (5% total risk)
Well-diversified.
Position Sizing Examples (Real Trades)
Example #1: Consistent 1% Risk
Account: $20,000 Risk: 1% = $200 per trade
Trade 1: AAPL
- Entry: $180, Stop: $175
- Risk per share: $5
- Position size: $200 / $5 = 40 shares
- Result: +$360 (win)
Trade 2: TSLA
- Entry: $240, Stop: $230
- Risk per share: $10
- Position size: $200 / $10 = 20 shares
- Result: -$200 (loss)
Trade 3: NVDA
- Entry: $470, Stop: $460
- Risk per share: $10
- Position size: $200 / $10 = 20 shares
- Result: +$400 (win)
Total risk: $600 (3% total) Total profit: $560 Return: 2.8%
Consistent sizing. Controlled risk. Profitable.
Example #2: Scaling Into Winner
Account: $50,000 Risk: 1% = $500 per trade
Trade: META
Entry 1: 50 shares at $350, stop $345
- Risk: $5 × 50 = $250 (0.5%)
Price rises to $360.
Entry 2: 50 shares at $360, stop $350 (breakeven stop)
- Risk: $10 × 50 = $500
- But stop at $350 means only $10 × 50 = $500 risk on second half
- First half locked in profit
Total position: 100 shares, avg $355 Stop: $350 (now breakeven on entire position)
Price rises to $375.
Exit: 100 shares at $375 Profit: ($375 - $355) × 100 = $2,000 Max risk: $500 (initial 1%) Return: 4%
Scaled in smartly. Controlled risk. Maximized gain.
Example #3: Martingale Disaster
Account: $10,000
Trade 1: Risk $200 (2%). Lose. Trade 2: Risk $400 (4%). Lose. Trade 3: Risk $800 (8%). Lose. Trade 4: Risk $1,600 (18%). Win.
Net: -$200 - $400 - $800 + $3,200 = +$1,800
You think: "Martingale works!"
Next streak: Trade 1: Lose $200 Trade 2: Lose $400 Trade 3: Lose $800 Trade 4: Lose $1,600 Trade 5: Need to risk $3,200 but only have $7,000 left
Account: From $10,000 to $3,800. 62% loss.
Martingale always blows up. Always.
The 10 Position Sizing Rules
Rule #1: Never Risk More Than 1-2% Per Trade
1% = Conservative. 2% = Aggressive. Never exceed 2%.
Rule #2: Calculate Position Size Before Entry
Know your size. Know your risk. Then enter the trade.
Rule #3: Use the Formula Every Time
Position Size = (Account × Risk%) / (Entry - Stop) No guessing. No feelings. Just math.
Rule #4: Adjust Size for Stop Distance
Wide stop = Fewer shares. Tight stop = More shares. Same dollar risk.
Rule #5: Total Risk Across All Positions
All open positions combined. Never exceed 5-6% total account risk.
Rule #6: Reduce Risk on Losing Streaks
3 losses in a row? Cut size in half. 5 losses in a row? Stop trading.
Rule #7: Don't Increase Size on Winning Streaks
5 winners in a row? Stick to 1%. Don't get cocky.
Rule #8: Scale Smartly
Add to winners. Never add to losers. Scale out to lock in profits.
Rule #9: Account Size Changes = Size Changes
Account grows? Risk amount grows. Account shrinks? Risk amount shrinks. Always recalculate.
Rule #10: Position Sizing > Strategy
You can have a mediocre strategy. With good position sizing, you'll survive. You can have a great strategy. With bad position sizing, you'll blow up.
Position Sizing Cheat Sheet
| Account Size | Risk Per Trade | Dollar Amount | Max Positions |
|---|---|---|---|
| $5,000 | 1% | $50 | 2-3 |
| $10,000 | 1% | $100 | 3-4 |
| $25,000 | 1% | $250 | 4-5 |
| $50,000 | 1% | $500 | 5-6 |
| $100,000 | 0.5-1% | $500-$1,000 | 6-10 |
| $250,000+ | 0.5% | $1,250 | 10+ |
Your Position Sizing Action Plan
This Week:
- Calculate your account's 1% risk amount
- Use position sizing formula on next 5 trades
- Track actual risk vs. planned risk
- Build spreadsheet for future trades
This Month:
- Master position sizing formula
- Scale into 2-3 winners smartly
- Track win rate by position size
- Identify optimal risk % for your psychology
This Quarter:
- Test volatility-adjusted sizing
- Develop scaling in/out rules
- Build complete position sizing system
- Track correlation between sizing and performance
Key Takeaways
- Position sizing = how many shares/contracts based on risk - not feelings, not guesswork
- Use the formula: (Account × Risk%) / (Entry - Stop) - math, not emotion
- Risk 1% per trade max - 2% is aggressive, never exceed
- Same risk every trade - consistency is key
- Wide stop = fewer shares, tight stop = more shares - same dollar risk
- Total risk across all positions - never exceed 5-6% total
- Adjust size as account changes - recalculate every week
- Scale into winners, never losers - add to strength
- Reduce risk on losing streaks - preserve capital
- Position sizing > strategy - bad sizing kills good strategies
- Calculate before entry - know your size, then trade
- Martingale always fails - never double down after losses
Position sizing separates gamblers from traders.
Gamblers size based on feelings. They blow up.
Traders size based on math. They survive. They grow.
Master position sizing. Control your risk. Consistent profits follow.
ChartMini automatically calculates optimal position sizes for every trade based on your account value and stop loss, tracks your total portfolio risk across all open positions, and alerts you when sizing exceeds your risk parameters so you never accidentally overexpose your account.