How to size a position
Four steps to turn a risk cap and a stop into an actual number of shares or contracts — the calculation that keeps any one trade from doing outsized damage.
Position sizing sounds technical and is not. It is the simple discipline of deciding what a trade may cost you before deciding how much to buy, and then letting that loss budget set the size. Work through these in order.
1. Fix your per-trade risk budget
Decide the small, fixed share of your account you are willing to lose on any single trade. Treat it as a hard cap, the same on every trade, so that a normal losing streak is survivable rather than fatal.
2. Measure the distance to your stop
The stop is the price at which the idea is wrong. The gap between your entry and that stop, in price terms, is the risk per unit — per share, per contract, per lot. A wider stop means more risk per unit and therefore a smaller position.
3. Let the budget divide the distance
Your size is simply the risk budget divided by the risk per unit. A larger loss budget or a tighter stop buys a bigger position; a smaller budget or a wider stop forces a smaller one. The size falls out of the risk, never the other way around.
4. Let conviction weight the call — inside the cap
If your approach grades its calls, you can lean a little harder on the strongest and lighter on the weakest while staying under the per-trade cap. On the measured system here that is exactly what the A-to-D grade provides: a built-in scale for where to weight a position, set before the outcome is known. The sizing pillar shows how the grade reads the same way across every model.
The order matters more than the maths. Decide what you can lose first; let that decide how much you buy. A trader who sizes from the loss almost never blows up; a trader who sizes from the hoped-for gain eventually does.
A made-up illustration of the four steps, not a specific recommendation. The procedure is exactly what you would run on a real setup, with your own numbers.
- Fix the budget. Account
$18,000, per-trade cap0.5%. So the most this trade may lose is$18,000 × 0.5% = $90. - Measure the stop distance. The setup enters at
$24.00and the level that says the idea is wrong sits at$23.25. Risk per share is the gap:$24.00 − $23.25 = $0.75. - Divide budget by distance.
$90 ÷ $0.75 = 120 shares. That position loses exactly$90— the cap, no more — if the stop is hit, and the forecast played no part in setting it. - Let the grade place it inside the cap. 120 shares is the ceiling for this setup. A
Bcall takes it in full; aDtakes a fraction, say40 shares($30at risk); anAsits near the top of what the cap allows. The cap of$90never moves — the grade only decides where under it the position sits.
Net: the loss budget set the size. Try to break it — if you wanted 240 shares because the trade “felt strong,” the risk would be $180, double the cap, which is exactly the oversize a fixed cap exists to forbid.
What a bad version of this looks like
The most common sizing error reverses the four steps. It starts from the lot size — “I usually trade 200 shares” — and only then looks for a stop, which means the stop ends up wherever the chosen size happens to put the risk rather than where the chart says the idea is wrong. It uses a round-number budget that ignores the stop distance entirely, so a wide-stop trade and a tight-stop trade carry wildly different risk for the same nominal size. And it flexes the per-trade cap with emotion: bigger after a win because confidence is high, bigger again after a loss to win it back. Every one of these untethers the size from the loss. The fix is never a better entry signal; it is doing the four steps in order, every time, so the number of shares is an output of the risk rather than an input to it.
If you only remember one rule: the stop sets the size, never the other way around. A trade you cannot size without breaching the cap is a trade whose stop is too wide for your account — so you pass it, you do not widen the cap.