Position Sizing¶
Position sizing is the process of determining how many shares or contracts to trade based on account equity, an acceptable risk percentage per trade, and the distance between the entry price and the stop loss. It converts an abstract risk tolerance into a concrete share count before a trade is entered. Position sizing is the primary determinant of long-run account survival, independent of entry and exit quality.
HOW IT WORKS¶
The standard fixed-fractional formula is:
Shares = (Account Equity × Risk %) ÷ (Entry Price − Stop Price)
The numerator is the dollar risk budget for the trade; the denominator is the dollar risk per share. Dividing the two produces the maximum position size that keeps the realized loss at or below budget if the stop is hit. As stop distance widens—due to higher volatility or a technically required wider level—the formula automatically reduces share count, holding risk constant while exposure flexes.
Variants include volatility-based sizing, where stop distance is expressed as a multiple of Average True Range, and the Kelly Criterion (f* = p − q/b), which derives size from edge and payoff ratio. Most practitioners use fractional Kelly (half or quarter) to limit drawdown severity.
Example. A $50,000 account risking 1% ($500 budget) buys a stock at $250 with a stop at $240 ($10/share risk): $500 ÷ $10 = 50 shares. Widening the stop to $230 ($20/share risk) reduces size to 25 shares. Dollar exposure changes; dollar risk does not.
Key limitations to note:
- Stops are not guaranteed; gaps, halts, and slippage can cause losses to exceed the budget, especially in illiquid names.
- Position sizing controls the path of an equity curve, not its expectation. It does not create edge in a negative-expectancy system.
- Correlated positions compound risk: five 1% positions in the same sector behave as a single 5% risk.
IN TAPEBOARD¶
Tapeboard surfaces position size calculations directly in the order panel. Enter your account equity, target risk percentage, and stop price alongside the entry price, and the terminal returns the share count and resulting dollar exposure before the order is placed. The trade journal records planned risk per trade alongside actual risk realized, so you can audit whether sizing drifted from the plan over time. Portfolio-level risk overlays show total open risk and sector concentration, flagging when correlated positions approach a defined aggregate limit.