Position sizing answers a simple question: how many units should I buy so that, if my stop-loss is hit, I lose only an amount I chose in advance? The same formula works for forex, stocks, crypto and futures. Traders who master it can survive long losing streaks, while those who guess often do not.

The Core Formula

Position size = amount you are willing to risk ÷ risk per unit.

  • The amount you are willing to risk is usually a small percentage of your account, such as 1%.
  • The risk per unit is the distance between your entry price and your stop-loss price.

This is the same principle as our forex lot size guide, but it applies to any market where you can state an entry and a stop.

A Stock Example

Your account is 10,000 and you risk 1%, which is 100. You want to buy a stock at 50 with a stop-loss at 47. The risk per share is 3. Position size = 100 ÷ 3 = 33.3, so you buy 33 shares. The position costs 33 × 50 = 1,650, or 16.5% of your account. If the stop is hit, you lose about 99, or roughly 1%.

Notice that the position can be large compared with the risk. What limits the loss is the stop, not the size of the position.

A Crypto Example

Your account is 10,000 and you risk 1% (100) on a coin priced at 2,000. You place a stop at 1,800, so the risk per unit is 200. Position size = 100 ÷ 200 = 0.5 units, which costs 1,000. If the stop is hit, you lose 100. Crypto markets trade around the clock and can move fast, so a stop may fill at a worse price than you set. Keep your risk percentage lower than you would use in calmer markets.

Use Volatility to Place the Stop

A stop placed at a random distance is easily hit by normal price noise. Many traders base it on the average true range (ATR), a measure of how much an asset typically moves in a period. Suppose the stock has an ATR of 2.5, and you place the stop at twice the ATR, which is 5 below your entry. Position size = 100 ÷ 5 = 20 shares. A calmer stock with an ATR of 1 would allow a stop of 2 and a position of 50 shares for the same 100 risk. The risk stays constant while the position size adjusts to the asset's volatility.

Total Exposure and Correlation

The formula caps the loss on a single trade, but several trades can hurt together. If you hold five positions that all rise and fall with the same market, risking 1% on each is really closer to risking 5% on one idea. Common safeguards include:

  • A maximum total open risk, for example 5% of the account.
  • A cap on the size of any one position, for example 20% of the account.
  • Avoiding several positions in highly correlated assets.

Fees and Slippage

Fees and spreads reduce your reward and add to your real loss. Include them in the calculation. If the stop is 3 away and the round-trip cost is 0.20 per share, the true risk is 3.20 per share, which reduces your position size from 33 to 31 shares.

Gaps and Leverage

Stops are not guaranteed. Prices can gap over your stop overnight or on news, and the loss may be bigger than planned. Leverage amplifies the effect: a position that is large relative to your account can lead to margin calls even if your risk per trade looks small. Read our guide to forex risk management for how to set limits that survive these events.

Common Mistakes

  • Choosing the position size first and moving the stop to fit.
  • Risking more after a loss to win it back.
  • Forgetting that a tight stop on a volatile asset is usually hit by noise.
  • Ignoring costs.
  • Using the full account balance when part of it is already tied up in other trades.

Your Next Step

Before your next trade, write down the risk amount, the entry and the stop, and divide. If the answer is smaller than the minimum size your broker allows, skip the trade. Use our Forex Lot Size calculator to practise the same logic with currency pairs. This article is educational, not investment advice, and trading carries a significant risk of loss.