How the position size is calculated
Position sizing is the most important risk management tool in trading. The formula is simple: Position Size = Risk Amount ÷ Risk per Share.
- Risk Amount = $25,000 × 2% = $500
- Risk per Share = $150 - $142 = $8
- Position Size = $500 ÷ $8 = 62.5 → rounded down to 62 shares
Why 2% risk per trade?
The 2% rule means you never lose more than 2% of your account on a single trade. This lets you survive long losing streaks without catastrophic damage:
| Consecutive Losses | 1% Risk | 2% Risk | 5% Risk |
|---|---|---|---|
| 5 losses | -4.9% | -9.6% | -22.6% |
| 10 losses | -9.6% | -18.3% | -40.1% |
| 20 losses | -18.2% | -33.2% | -64.2% |
At 2% risk, even 20 consecutive losses (extremely unlikely with a tested strategy) still leaves you with two-thirds of your account. At 5%, the same streak nearly wipes you out.
Position size by different risk levels
| Risk % | Risk $ | Shares | Position Value |
|---|---|---|---|
| 0.5% | $125 | 15 | $2,250 |
| 1% | $250 | 31 | $4,650 |
| 2% | $500 | 62 | $9,300 |
| 3% | $750 | 93 | $13,950 |
| 5% | $1,250 | 156 | $23,400 |