Position Sizing: The Only Math That Keeps You in the Game
Risk first, entry second
Most traders pick a share count, then hope. Professionals fix the dollar risk per trade and let the stop distance decide the share count.
- Risk per trade
- 0.5–1.0% of equity
- Max open risk
- 3–5%
- Daily stop
- 2–3%
The formula
Shares = (Account × Risk%) / (Entry − Stop)Example: a $25,000 account, 1% risk ($250), entry $50, stop $48. Risk per share is $2, so you buy 125 shares. If the stop were $47.50, risk per share is $2.50 and you buy 100 shares.
Why fixed-fractional
Risking a constant percentage means losses shrink in dollar terms during a drawdown and grow during a winning run. It is mathematically impossible to go to zero from a string of losses alone.
Drawdown math traders ignore
| Drawdown | Gain needed to recover |
|---|---|
| 10% | 11% |
| 25% | 33% |
| 50% | 100% |
| 75% | 300% |
The takeaway
Protecting against deep drawdowns matters more than catching every winner. Small, survivable losses compound in your favour.