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Intermediate3 min readRisk and Portfolio Management · 2/11

Position Sizing: How Much to Put in One Trade

Many people ask "how much should I buy?" before asking "how much will I lose if I am wrong?" Position sizing reverses the order: you start from the loss you accept and work out the number of shares from it.

What you will learn

  • Tell the money in a trade apart from the money actually at risk.
  • Work out the number of shares step by step with an example.
  • See why you also need a cap on the position itself.
The lesson as a short video · 20 seconds · Watch on YouTube
In this lesson
  1. Two different numbers
  2. The calculation, step by step
  3. Why you also need a cap on the position
  4. Check yourself
  5. Summary
  6. Related terms

Two different numbers

The amount you put into a trade and the amount you can lose in it are different. If you buy EGP 10,000 worth and decide to exit if the price drops 10%, you are not risking the 10,000; you are risking about 1,000 of it, provided the exit really happens at that level.

Position sizing starts from the second number. First you decide the most you accept losing on one trade as a share of all your money, then you see how far the stop needs to be, and the number of shares follows from the two.

The calculation, step by step

1
Your total capital100,000
2
Most you accept losing on the trade1% = 1,000
3
Loss per share if the stop is hit20 - 18 = 2
4
Number of shares1,000 ÷ 2 = 500
5
Position value500 × 20 = 10,000That is 10% of your capital
From the accepted loss to the number of shares, then the position value.
A worked exampleYou have EGP 100,000 and decide that the most you will lose on one trade is 1%, or EGP 1,000. You want to buy an invented company, Nile Packaging, at EGP 20, and your reason for buying no longer holds if the price falls below 18. Each share can cost you EGP 2. 1,000 ÷ 2 = 500 shares, and the position is worth 500 × 20 = 10,000.

The 1% here is an example for the arithmetic, not a rule. Each person sets a share that suits their money and circumstances. What matters is that it is set before the trade and stays roughly the same from one trade to the next.

Why you also need a cap on the position

If the stop is very close, the arithmetic gives a large number of shares. Same example with a stop at 19.80: a loss of 0.20 per share means 5,000 shares worth 100,000, all your money in one stock.

Watch outThis calculation assumes you exit exactly at the stop. In reality the price can open well beyond it or trading can be halted, and the real loss is then larger. That is why many people also set a maximum value for any single position, however close the stop is.

Do not forget the costs of buying and selling, which add a little to the loss. Ask your brokerage firm which fees apply to you and include them.

Try it on your portfolio

Record your positions in the portfolio and compare each one with your total money.

PortfolioAll stocks

Check yourself

1. You accept at most EGP 600, the price is 15 and the stop 14. How many shares?

The loss per share is EGP 1, and 600 ÷ 1 = 600 shares.

2. Where does position sizing start?

You set the accepted loss and the stop distance; the number of shares follows.

Summary

  • The money in a trade is not the same as the money at risk.
  • Number of shares = accepted loss ÷ loss per share down to the stop.
  • Cap the position value too, because the real loss can exceed your plan.

Related terms

Stop lossLiquidity

Related lessons

Risk and Portfolio ManagementThe Risk-Reward RatioInvestor PsychologyOverconfidence in Trading
Previous · 01Risk Management BasicsNext · 03Stop Loss: How to Set It

Educational content only, not investment advice. Companies and figures in the examples are invented for illustration.