How to Size a Position: How Much Should You Risk on Each Trade?

What is position sizing?

Position sizing decides how much capital you put into a trade. Even with the same idea, if one person risks a small part of the account and another a large part, the results are very different. It is the most effective tool in risk management.

The basic formula

Position size = amount to risk ÷ distance between entry and stop

An example with purely hypothetical numbers:

• Account value: 100,000
• Share of the account risked on this trade: 1%, so 1,000
• Entry price 50, stop price 48, so the distance per unit is 2
• Position size: 1,000 ÷ 2 = 500 units

If the stop is hit, the planned loss is roughly 1,000. In reality slippage and gaps can push it higher.

Why small percentages?

Losing streaks are unavoidable. If the risk per trade is small, a streak will not wipe out the account. Large percentages create a deep drawdown even in a short streak. See What is maximum drawdown?

Common mistakes

1. Sizing by emotion: Increasing the position because "this time I'm sure".
2. Ignoring stop distance: The same capital means a small position with a wide stop and a large one with a tight stop.
3. Forgetting leverage: Leverage can grow the position and the amount at risk with it. See Leverage and liquidation risk.
4. Leaving out costs: Commissions and slippage raise the real risk. See Commissions and slippage in backtests.

Apply it during testing too

Use the same sizing rule in backtests and the virtual portfolio, otherwise the results are not realistic. For the overall framework, see the Algo trading risk management guide.

This article is educational and not investment advice. Past results do not guarantee future results; trading carries a risk of loss. Example numbers are hypothetical.