The core idea
Beginners size positions by gut — this one feels good, I'll go big. Professionals size by math: decide the most you'll lose if you're wrong, then work backward to the position size. Your confidence doesn't set your size; your stop (the price where you admit you're wrong and exit) does. Risk is position size × stop distance, not a feeling.
The 1% rule
Risk no more than 1% of your account on a single trade. On a $10,000 account, that's $100. Why it matters: losing streaks happen to everyone. Ten straight 1% losses leave you down roughly 10% — annoying, recoverable. Ten straight 10% losses leave you down about 65% — and now you need a near-triple just to get back to even. The math of drawdowns is brutal on the way down and worse on the way back. Survival is the whole game, and position sizing is how you buy survival.
The formula
Shares = (account × risk %) ÷ (entry price − stop price). In words: divide the dollars you're willing to lose by what you'd lose per share if stopped out. The result is how many shares keep the loss inside your budget.
Worked example
An illustration with round numbers. Account: $10,000. Risk per trade: 1% → $100. You want to buy a stock at $50 with a stop at $48:
- Dollars at risk: $10,000 × 1% = $100
- Loss per share if stopped: $50 − $48 = $2
- Shares: $100 ÷ $2 = 50 shares → a $2,500 position
Notice: the position is 25% of the account, but the risk is 1%. That's the lesson — size and risk are different things, and the stop is what connects them. No stop, no math, no trade.
Sizing options trades
Options make this simpler in one way: for a bought option, the most you can lose is the premium you paid. One contract bought at $1.50 = $150 of max risk. Apply the same rule — that $150 should fit inside your per-trade risk budget. (Sold options are a different animal with different risk math; the lessons on cash-secured puts and buyer-vs-seller risk cover that side.)
Use the calculator
You don't have to do this arithmetic by hand every time. This site has a position-size calculator — plug in your account size, risk percent, entry, and stop, and it tells you the share count. Run every trade through it before you place the order. Thirty seconds now beats regret later.
Common mistakes
- Sizing by confidence. "I'm really sure about this one" is how 1% becomes 10%. The market doesn't grade your certainty.
- Trading with no stop. Without a stop price, position size is meaningless — your risk is the entire position.
- Moving the stop to avoid the loss. A stop you won't honor isn't a stop. The math only works if you actually exit.
- Averaging down without a plan. Every add is a new risk decision. Adding to a loser because "it's cheaper now" doubles down on being wrong.
- Counting the same risk twice. Three positions in three stocks that all move together is one big position wearing a disguise.
The takeaway
Before every trade, estimate the planned loss if the stop fills at the chosen price. Size the position to a risk budget you can afford, rather than moving a stop to fit a larger position. A stop order is not a guaranteed loss cap: gaps, slippage, liquidity and fees can make the actual loss larger. Correlated positions can lose together, so consider total exposure as well as each trade.
Education only, not investment advice. Trading involves real risk of loss, including loss of everything you put in. See the full disclaimer.