Position sizing: the math of risking 1%
How much you buy matters more than what you buy. One formula turns a risk limit into a share count, and the numbers show why small is durable.
Kivorent News desk, , 2 min read
What to know
- Position size is the amount you are willing to lose divided by the distance from your entry to your stop.
- Risking 1% per trade, ten losses in a row costs about 10% of the account. At 5% per trade, the same streak costs about 40%.
- Losses need larger gains to recover. A 40% loss takes a 67% gain to get back to even.
Most new traders pick a round number of shares or put in whatever cash they have free. Position sizing replaces that with one decision made in advance: how much of the account you are prepared to lose if this trade is wrong.
The formula
Position size = amount at risk ÷ risk per share
- Amount at risk is your account size multiplied by the percentage you will risk on one trade.
- Risk per share is the distance between your entry price and the price where you will exit if you are wrong, your stop.
A worked example
- Account: $25,000
- Risk per trade: 1%, which is $250
- Entry: $50.00
- Stop: $48.00
- Risk per share: $2.00
$250 ÷ $2.00 = 125 shares. The position is worth $6,250. If the stop is hit, the loss is $250.
Note what the formula does. The position is a quarter of the account, and the risk is 1% of it. Those are two separate numbers. A tighter stop allows a larger position for the same risk, and a wider stop requires a smaller one.
Why small percentages survive
Every trader has losing streaks. This is what ten losses in a row do at different risk levels:
| Risk per trade | Account after 10 straight losses | Gain needed to recover |
|---|---|---|
| 1% | Down 9.6% | 10.6% |
| 2% | Down 18.3% | 22.4% |
| 5% | Down 40.1% | 67.0% |
| 10% | Down 65.1% | 186.8% |
The last column is the trap. Lose half your account and you need to double what is left to get back to where you started. The deeper the hole, the steeper the climb out.
The limits of a stop
The formula assumes you exit at your stop price. Sometimes you cannot.
- Gaps. A stock can open well below your stop after overnight news, and the loss is larger than planned.
- Slippage. In a fast market, a stop order fills at the next available price.
- Related positions. Five trades at 1% each in five similar stocks behave like one trade at 5%.
For those reasons many traders also cap the total they have at risk across all open positions.
Applying it to a funded account
On a prop firm account, the number that matters is your distance to the drawdown floor, not the account size. If the floor is $2,500 away, risking $250 a trade gives you ten losses before the account closes. Risking $500 gives you five. See trailing versus static drawdown for how that distance can shrink.
Applying it to binary contracts
For a prediction market contract that pays $1 or nothing, the most you can lose is what you paid. To risk $250 on a contract priced at 62 cents, you would buy about 400 contracts, assuming you hold to settlement.
A checklist before each trade
- Where is my exit if I am wrong?
- How many dollars is that per share or contract?
- What is 1% of my account, or of my cushion?
- Divide. That is the size.
- Does this push my total open risk past my limit?
This article is general information. It is not investment advice, and trading involves the risk of losing money.
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