Position Sizing: The Exact Formula Every Trader Needs
Position sizing is not about how much you want to make — it's about how much you're willing to lose. Here's the math that separates professional risk management from gambling.
Risk Management · May 23, 2026 · 5 min read
You can have a profitable strategy and still blow up your account with bad position sizing. Conversely, mediocre strategies become survivable with excellent position sizing. Size correctly and you stay in the game long enough to improve. Size incorrectly and one bad run ends everything.
The Core Formula
Position size = Account risk ÷ Trade risk. Account risk is the dollar amount you're willing to lose on this trade (e.g., 1% of $10,000 = $100). Trade risk is the distance from entry to stop loss per unit. Example: Account = $10,000, risk per trade = 1% = $100, entry = $50, stop = $48, trade risk per share = $2. Position size = $100 ÷ $2 = 50 shares. Simple arithmetic that most traders never do.
The 1-2% Rule
Professional traders rarely risk more than 1-2% of account equity per trade. At 1% risk, you need 100 consecutive losses to blow up — statistically near impossible with any edge. At 5% risk (common among beginners), 14 consecutive losses wipes you out — achievable in any losing streak with bad luck. The percentages seem small and the positions feel 'too small' at first. That's exactly correct — protecting capital is the priority, not maximizing position size.
Correlation and Portfolio Risk
When trading multiple positions simultaneously, watch total portfolio risk, not just individual trade risk. Three 1%-risk positions in correlated instruments (e.g., three tech stocks) can effectively become a 3% risk trade if they all stop out together during a market selloff. True position sizing considers correlations: cap total correlated exposure at 3-5% regardless of individual trade risk percentages.
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