Position Sizing: Formula, Example and Journal Fields

The position sizing formula

Position sizing answers a practical question: how many shares, contracts, or units fit within a defined amount of money at risk? The simple formula is position size = money at risk divided by risk per unit. For a stock, risk per unit is usually the absolute difference between the planned entry price and planned stop price. If the result is not a permitted trading increment, round down to an allowed size and recalculate the planned risk.

The calculation needs three decisions before entry: the planned entry, planned stop, and money available for risk on the trade. That amount should come from the trader's own account rules and circumstances. There is no single percentage that suits every account, market, or person, so this guide does not prescribe one.

Worked stock example

Suppose a trader plans to buy a stock at $50.00 and uses $48.75 as the planned stop price. The distance from entry to stop is $1.25 per share. The trader's own risk plan allows $250 for this trade. Position size is therefore $250 divided by $1.25, which equals 200 shares.

A quick check reaches the same answer: 200 shares multiplied by $1.25 of risk per share equals $250 of planned risk. If the order fills at $50.00 and the exit fills at exactly $48.75, the gross trading loss is $250 before commissions, fees, taxes, or other costs. That exact outcome is only a planning case, not a guaranteed result.

If the calculation produced 200.8 shares and the account allowed only whole shares, round down to 200. Rounding up would exceed the stated planned risk. Save the recalculated figure in the journal.

Keep the inputs in the right order

The stop is an input to position sizing, not an output chosen to make a preferred size fit. First define where the trade idea would no longer match the plan. Then measure the distance from the intended entry to that price. Finally, divide the money at risk by the resulting risk per unit.

Reversing that order can hide risk. Starting with a desired size and moving the stop closer reduces the number on paper, but it also changes the trade plan. Each input needs its own reason in the journal.

Journal fields that preserve the calculation

Store the inputs as well as the calculated size. A later review can then show whether size matched the plan and why the result changed.

Contracts and tick values change risk per unit

For a contract quoted in ticks, the same position sizing formula still works, but risk per unit means risk per contract. Calculate the number of ticks between the planned entry and stop, then multiply by the contract's value per tick. If the stop is 25 ticks away and each tick is worth $5, risk per contract is $125. A $500 money-at-risk amount divided by $125 gives four contracts before any other limit is applied.

Contract specifications vary by product, and similar products can have different tick sizes or values. Other instruments may use multipliers or lot sizes. Confirm the current specification and permitted increments rather than reusing a stock calculation unchanged.

A stop price is not a guaranteed fill

The planned stop price makes the size calculation possible, but it does not cap the actual loss. Investor.gov explains that when a stop price is reached, a stop order becomes a market order. In a fast-moving market, its execution price can differ significantly from the stop price. A gap, limited liquidity, delay, partial fill, or trading cost can also move the recorded result away from the plan.

A stop-limit order adds price control, but it may not execute if the market moves beyond its limit. Order behavior also varies by broker and venue. Record the order type and actual fill instead of assuming the planned stop was the exit.

Compare planned risk with actual loss

After the trade closes, calculate the result from actual entry and exit fills, final quantity, and the costs included in the journal. Keep this realized result separate from planned risk. The difference can reveal slippage, fees, a changed size, a moved stop, a partial exit, or an execution outside the original plan.

One difference does not establish a pattern. Across comparable trades, the gap between planned and actual risk can show whether the sizing process is followed consistently and where execution assumptions need inspection.

Position sizing checklist

Use the same short sequence before each calculation so the journal captures a repeatable process.

1. Write the planned entry and the price that invalidates the trade plan.
2. Calculate risk per share, contract, or permitted unit using the correct multiplier or tick value.
3. Divide the trade's money-at-risk amount by risk per unit, then round down to an allowed size.
4. Check the final size against account, broker, liquidity, and market limits.
5. After the trade, record actual fills, costs, and the reason for any difference from planned risk.

What position sizing can and cannot do

Position sizing makes the relationship between a planned stop and trade-level risk explicit. It can prevent different stop distances from quietly creating different planned exposures and gives the journal a way to compare intended size, final size, and results.

It cannot guarantee an exit price, prevent every loss, or decide whether a trade is suitable. It also does not replace account-level controls for positions affected by the same event. Treat the output as one documented input, then verify what happened after execution.