Position sizing
Position sizing is deciding how many shares to buy in a trade so that, if your stop-loss is hit, the loss is a small, planned part of your capital.
Number of shares = (Capital × Risk per trade %) ÷ (Entry price − Stop-loss price)
What it is
Most beginners decide how much to buy by feel, or by how sure they are. Position sizing replaces that with a rule. First you decide the most you are willing to lose on one idea. Then the distance to your stop-loss tells you how many shares that allows.
Many traders cap the risk on any single trade at a small slice of their capital, often around 1% to 2%. That way a string of losses, which happens to everyone, does not wipe them out.
How it works
Risk is not the amount you invest. It is the amount you lose if the stop is hit. Buying ₹50,000 of a share with a stop 2% away risks about ₹1,000. Buying ₹10,000 of a share with a stop 20% away risks about ₹2,000.
So a share with a wide stop, because it is volatile, gets fewer shares. A share with a tight stop can take more. Every trade ends up risking roughly the same rupee amount.
Why it matters
Nobody wins every trade. What protects your capital is that the losers are small. Ten losing trades in a row at 1% risk each costs about 10%. The same streak at 10% risk each can cost most of your account.
Position sizing also keeps emotions in check. When each loss is small and expected, it is easier to follow your stop-loss and your plan.
Sizing a trade
You have ₹2,00,000 and decide to risk 1% per trade, which is ₹2,000. You want to buy at ₹410 with a stop-loss at ₹390, a risk of ₹20 per share. Number of shares = ₹2,000 ÷ ₹20 = 100 shares, costing ₹41,000. If the stop is hit, you lose about ₹2,000.
Common mistakes
- Confusing the amount invested with the amount at risk.
- Taking bigger positions on trades you “feel sure” about.
- Increasing size after losses to win the money back.
- Ignoring gaps, which can make the real loss bigger than planned.
You will risk ₹1,500 on a trade. Entry is ₹300 and stop-loss is ₹285. How many shares can you buy?
- 100
- 5
- 500
Show the answer
100. Risk per share is ₹300 − ₹285 = ₹15. ₹1,500 ÷ ₹15 = 100 shares.
Common questions
How much should I risk per trade?
Many traders risk a small fixed share of capital on each trade, often 1% to 2%. The exact figure is a personal choice, but smaller keeps you in the game through losing streaks.
What is the 1% rule in trading?
It means never losing more than 1% of your trading capital on one trade, by setting the position size based on the stop-loss distance.
Does position sizing apply to long-term investing?
Yes, in a different form. Long-term investors usually limit how much of their portfolio sits in any one company, so one bad outcome does not hurt too much.
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