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What Is Position Sizing?

Determining how many shares or contracts to trade based on account size and risk tolerance.

Position sizing is the discipline of determining how large each trade should be relative to total account capital. Most professional traders cap risk per trade at 0.5-2% of account equity, then size positions so that hitting the stop loses exactly that amount.

Formula: Position size = (Account × Risk%) ÷ (Entry − Stop). For a $10,000 account risking 1% with a $3 stop, position size is $100 ÷ $3 = 33 shares.

The importance of position sizing is impossible to overstate. The math of recovery is brutal: a 50% drawdown requires a 100% gain to break even. Conservative position sizing keeps individual losses small enough that recovery is mathematical rather than miraculous. Traders who size consistently survive; traders who don't, don't.

Related terms

• Risk Management — The systematic process of identifying and controlling exposure to losses.
• Stop Loss — A predefined exit price that limits losses if a trade moves against you.
• Drawdown — The peak-to-trough decline in account equity during a losing streak.