Most beginners obsess over what to buy. Professionals obsess over how much. Position sizing is the difference between a bad trade and a bad month: a bad trade costs you the amount you planned to risk; a bad month means you never planned it at all.
The 1% rule
The rule is simple: never risk more than 1% of your account on a single trade. Risk here means the amount you lose if your stop-loss is hit — not the amount you spend entering.
Why 1%? Because drawdowns are asymmetric. Lose 10% and you need 11% to recover. Lose 50% and you need 100%. At 1% risk per trade, ten consecutive full losses cost you roughly 10% of the account — a bad streak you can survive. At 10% risk per trade, the same streak costs you 65% — a hole most traders never climb out of.
1% is a starting point, not a law. Some traders use 2%; some scale down to 0.5% while learning. The principle doesn't change: fix the dollar risk first, then let the math tell you the share count.
The formula
Position sizing is one division problem:
Shares = (Account capital × Risk %) ÷ (Entry price − Stop price)
The numerator is your planned risk in dollars. The denominator is your risk per share — the distance to your stop. Divide the two and you get the share count whose loss at the stop exactly equals your planned risk. Always round down to whole shares: rounding up would risk more than you planned.
A worked example
Account: $10,000. Risk: 1% → $100 planned risk. Entry: $150. Stop: $140 → $10 risk per share. Shares: 100 ÷ 10 = 10 shares ($1,500 position value). If the stop is hit, you lose $100 — exactly 1%. Notice what the formula did: a tighter stop would have meant more shares for the same $100 risk; a wider stop, fewer. The dollar risk never moves.
Then check the reward
Sizing answers "how much can I lose?" — but you should only take the trade if the upside justifies it. With a $150 entry, $140 stop, and $180 target: risk $10/share, reward $30/share — a 1:3 risk/reward. A common minimum is 1:2, which lets you be right less than half the time and still profit. If the target doesn't clear your minimum ratio, the correct position size is zero: skip the trade.
Common sizing mistakes
- Sizing by feel. "100 shares sounds reasonable" is not a method. Run the formula every time.
- Rounding up. 10.9 shares becomes 10, not 11. The rounding direction is the whole point.
- Moving the stop to fit the size. The stop goes where the trade is proven wrong (see our stop-loss guide); the size follows. Never the reverse.
- Same size for every trade. Volatility differs per stock — the formula adapts automatically because the stop distance adapts.
Educational content only — not investment advice.