The position sizing formula

Risk & Position Sizing

Dollar risk over stop distance

The formula: position size equals your dollar risk divided by the distance from entry to stop-loss. Decide the dollar risk first. Decide the stop second. The formula then tells you exactly how many shares or contracts to trade.

A worked example

A $10,000 account risking 1% ($100) on a stock with a $2 stop distance can buy 50 shares. That same $100 risk on a $0.50 stop distance allows 200 shares. The stop decides the size, not the other way around.

The stop comes first, size follows

A trader who picks the share count first and then figures out where the stop goes has it backwards. The stop belongs where the setup is actually invalidated, and the size adjusts to fit around it.