The question is not what to buy, it is how much
Most people decide what to buy carefully and decide how much to buy by feel — a round number, whatever cash is spare, or the same amount as last time. Yet position size determines the damage a single wrong decision does, and it is the one variable entirely under your control. Prices do what they do; the number of shares is yours. This guide covers the standard sizing method, the arithmetic of recovering from losses, and where the method stops applying.
The rule: risk a fixed percentage, not a fixed amount
Decide in advance what fraction of the account you are prepared to lose if the idea fails — commonly 1% or 2%. Decide the price at which you would accept it has failed. The distance between your entry and that price, divided into the money you are willing to lose, gives the share count:
shares = (account × risk %) ÷ (entry price − stop price)
| Input | Example |
|---|---|
| Account size | $50,000 |
| Risk per trade | 2% = $1,000 |
| Entry price | $40.00 |
| Stop price | $34.00 (risk per share $6.00) |
| Shares | $1,000 ÷ $6.00 = 166 |
| Position value | 166 × $40 = $6,640 (13% of the account) |
The important feature is that a wider stop produces a smaller position, automatically. If your stop were at $38 instead, the risk per share would be $2 and you could buy 500 shares — same $1,000 at risk, much larger position. Volatile ideas need wider stops and therefore get less capital, which is the correct relationship and the opposite of what conviction alone produces. The Position Size Calculator does this arithmetic and also reports the reward-to-risk ratio if you enter a target price.
Why 1–2%
Because of how losses compound. Losing 50% of an account requires a 100% gain to recover, and the required gain grows much faster than the loss that caused it.
| Account drawdown | Gain needed to recover | Consecutive 2% losses to get there |
|---|---|---|
| −10% | +11% | 5 |
| −20% | +25% | 11 |
| −30% | +43% | 18 |
| −50% | +100% | 34 |
| −75% | +300% | 69 |
At 2% per idea, a run of five failures costs about 10% — unpleasant, recoverable, and survivable while you work out what went wrong. At 20% per idea, the same five failures leave you down two thirds and needing to triple what remains. The percentage is not about optimism regarding any single decision; it is about staying solvent through a sequence of them.
Reward to risk
reward:risk = (target − entry) ÷ (entry − stop). With entry $40, stop $34 and target $58, that is $18 ÷ $6 = 3:1. The ratio and your hit rate together decide whether an approach makes money at all:
| Reward:risk | Win rate needed to break even |
|---|---|
| 1:1 | 50% |
| 2:1 | 33% |
| 3:1 | 25% |
| 5:1 | 17% |
This is why being right less than half the time can still work, and why being right most of the time can still lose money if the losses are larger than the wins. Costs shift every row upward: commissions, the bid-ask spread and tax on gains all mean the real break-even win rate is higher than the table shows.
Where the method breaks down
- Gaps. A stop is not a guarantee. A stock that closes at $36 and opens at $22 after news fills your order near $22, not $34. Overnight and weekend gaps are why a stop-loss caps intention, not outcome.
- Correlated positions. Five separate 2% risks in five banks is one 10% risk in the banking sector. Size by exposure to what actually drives the price, not by ticker count.
- Stops that are too tight. A stop placed inside the normal daily range gets hit by noise. If a sensible stop makes the position uncomfortably large, the answer is to lower the risk percentage, not to move the stop closer.
- Long-term investing without stops. If you intend to hold through drawdowns on a valuation view, there is no stop price, so this formula does not apply. Size by portfolio weight instead — a maximum percentage per holding and per sector.
- Illiquid shares. A calculated size you cannot exit without moving the price is too large whatever the arithmetic says. Compare it with average daily volume.
Practical notes
- Recalculate the risk amount from the current account value, not the starting one. Risk shrinks automatically after losses and grows after gains, which is the behaviour you want.
- Round share counts down, never up.
- Cap the position value as well as the risk — many people use 20–25% of the account as a ceiling regardless of how tight the stop is.
- Write the stop price down before buying. A stop decided after the price falls is not a stop, it is a hope.
- Include commissions in the loss: risking $1,000 with $20 of round-trip fees is really $1,020.