Position sizing

How big should a trade be?

Position size means how much you buy or sell: how many shares, or how many futures contracts.

Most beginners pick a size by feel: "10 shares sounds good." That's like filling a bucket without looking at how big the bucket is.

Good traders work backwards. They decide how many dollars they're willing to lose first. Then they pick the size that matches.

The 1% rule

A common rule is to risk about 1% of your account on any one trade. "Risk" here means the money you'd lose if your stop loss gets hit.

• $10,000 account: 1% is $100 per trade.
• $50,000 account: 1% is $500 per trade.

Why so small? Because losing streaks happen to everyone. Here's what 10 losses in a row do to a $10,000 account:

• Risking 1% each time, it drops to about $9,040. Annoying, but fine.
• Risking 10% each time, it drops to about $3,490. Most of the account is gone.

Same trader, same bad luck. The only difference was size.

The recipe

Position size = dollars at risk, divided by (stop distance x dollars per point)

"Stop distance" is how far your stop is from where you get in. "Dollars per point" is how much one share or contract gains or loses when price moves 1.00. For a stock, that's just $1 per share.

Example with a stock

Account: $10,000. Risk 1%: $100.

• You want to buy at $50.
• Your stop is at $48. If price gets there, your idea was wrong.
• Stop distance: $2 per share.
• Size: $100 divided by $2 = 50 shares.

If the stop gets hit: 50 shares x $2 = $100. Exactly 1%.

Example with futures

Account: $50,000. Risk 1%: $500. You trade the micro Nasdaq future, called MNQ. Each point is worth $2 per contract.

• Stop distance: 20 points.
• Each contract would lose 20 x $2 = $40.
• Size: $500 divided by $40 = 12.5. Always round down, so 12 contracts.

The bigger NQ contract is worth $20 per point. The same 20 point stop costs $400 per contract, so you could trade only 1.

The stop decides the size

A wide stop means a smaller size. A tight stop means a bigger size. Either way, the dollars you lose if you're wrong stay about the same: 1%.

What goes wrong

• Picking the size first, then the stop. That's backwards. Find where you're wrong first, then do the math.
• Rounding up. 12.5 contracts is 12, never 13.
• Forgetting fees and slippage. Your real loss can be a bit bigger than planned, so leave a little room.
• Raising the risk after a loss to "win it back." That's how a small losing streak becomes a big one.

Remember

• Decide the dollars you'll lose first. Many traders use about 1% of the account.
• Size = dollars at risk, divided by (stop distance x dollars per point).
• Always round down.
• Small size is what lets you survive losing streaks.