Position size: how much should I buy?
It is your stop distance, not the price or a feeling, that decides how much you buy: fix the amount you accept losing per trade and size the position to it.
In the chart above there are three horizontal dashed lines: ‘MARKET’ is today's price, ‘LIMIT’ the planned entry, ‘STOP’ the level where the idea becomes invalid. This lesson's question is not where the lines are but what you do with the distance between them: ‘How much money should I put into this trade?’
Most people answer this by feel: a lot for a trade they strongly believe in, a little for one they do not. But belief does not change what price will do. The method professionals use is simple: first you decide the most you accept losing on any trade as a share of your total account, for example 1 percent. Then you measure the distance between entry and stop. Position size comes from the ratio of the two.
A concrete example: your account is 10,000 lira and your risk per trade is 1 percent, that is 100 lira. Entry is 50 lira, stop 48 lira; risk per share is 2 lira. You divide 100 by 2: you buy 50 shares, and your position is worth 2,500 lira. If the stop were at 45 lira, risk per share would be 5 lira and you would buy only 20 shares. As the stop moves further away the position shrinks; this way, whatever the trade, your loss is the same when you are stopped out.
The biggest benefit of this method is that a single bad trade cannot wreck your account. Even after five stops in a row you lose roughly five percent of your account and stay in the game.
This calculation also protects you from emotional decisions. Before entering, the answer to ‘how much will I lose at worst?’ is known. When price approaches the stop there is no reason to panic or move the stop: your loss is a small amount you accepted in advance. Position size decides not the outcome of one trade but whether you are still in the game after hundreds of trades.
How to read it
- Decide your risk per trade up front and do not change it; for beginners, 0.5 to 1 percent is a common range.
- Measure the distance between entry and stop as an amount per share (or per coin).
- Divide the risk amount by this distance: the result is the number of units you buy. Units × entry price is the total size of the position.
- If you use leverage, do not change the calculation: leverage shrinks the margin, not the risk. When stopped out, your loss should still be the same amount.
Trap
The most common mistake is sizing the position by the dream of ‘how much will I make’ rather than by the stop. The second mistake is increasing the position after a string of losses to make it back: this is the fastest way for a bad streak to seriously erode the account. The third mistake is treating several very similar trades (such as a few stocks from the same sector) as separate risks: they can all be stopped out at once.
Tip
Combine the entry and stop levels of the plan on the analysis screen with the calculation you learned in this lesson: the plan tells you where to enter and where you are proven wrong; how much to buy is yours to calculate.
Glossary
- Risk amount
- The money you accept losing in advance if you are stopped out.
- Position size
- The total amount you put into the trade, or the number of units you buy.
- Correlation
- The tendency of two assets to move together; when it is high, the risks add up.
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Calculate position size with an analysis plan →For information only, not investment advice.