What Is Position Sizing?

Position sizing is the process of converting an allowed monetary loss and a trade’s invalidation distance into the number of units, shares, lots, or contracts to trade. For a simple stop-based position: position size = money at risk ÷ loss per unit at the stop The calculation must use the instrument’s contract specification and account for currency conversion and trading costs.

Worked example

A trader allows a USD 120 planned loss. The distance from entry to stop represents a USD 3 loss per share. Position size = USD 120 ÷ USD 3 = 40 shares If estimated round-trip costs and slippage are USD 0.20 per share, the economic loss per share is closer to USD 3.20. A conservative size is: USD 120 ÷ USD 3.20 = 37.5 shares The trader would round down to a valid order size, not up.

Inputs by instrument

For products with nonlinear payoffs or no reliable stop execution, a simple entry-to-stop calculation may be insufficient.

Position size is not total account risk

After sizing one trade, check:

• existing positions and pending orders;
• positions that share a currency, sector, index, or catalyst;
• risk per trade idea;
• daily and maximum-loss capacity;
• whether the order can gap or slip beyond its stop;
• the effect of several strategies trading the same account.

The correct stand-alone size can still be too large at the portfolio level.

Common errors

• using a fixed lot size across different stop distances;
• confusing margin requirement with maximum loss;
• using nominal prop-account balance instead of available loss capacity;
• omitting spread, commission, or currency conversion;
• rounding up;
• assuming a stop guarantees the exit price;
• changing the stop after entry without recalculating exposure.