Find how many shares to buy so a stopped-out trade only risks a fixed percentage of your account.
Risk amount = Account balance × Risk %. Per-share risk = Entry − Stop-loss. Position size (shares) = Risk amount ÷ Per-share risk.
Educational tool only — not investment advice. Markets involve risk; past performance and illustrative math don't guarantee future results.
Position sizing based on a fixed percentage of account risk — commonly 1-2% per trade — is one of the few genuinely universal pieces of trading risk management, and the formula behind it is simple: shares or units to buy equals the dollar amount you're willing to risk, divided by the risk per share (entry price minus stop-loss price). A trader with a $50,000 account risking 1% ($500) on a stock bought at $180 with a stop-loss at $175 has $5 of risk per share, which works out to exactly 100 shares — change the account size, risk percentage, or stop-loss distance, and the correct position size changes proportionally.
The real value of this rule shows up not on any single trade, but across a losing streak, which every trading approach eventually experiences. At a 1% risk-per-trade rule, a genuinely brutal run of 20 consecutive losing trades reduces the account by roughly 18-20% (not exactly 20%, since each loss is calculated on a shrinking balance) — painful, but recoverable. At 2% risk per trade, that same losing streak becomes considerably more damaging. This is precisely why percentage-based position sizing, rather than a fixed dollar amount per trade, is the standard approach: it automatically scales position size down as an account shrinks during a rough stretch, and scales back up as the account recovers, rather than risking the same fixed dollar amount regardless of how the account balance has actually changed.
It's a risk management guideline stating that no single trade should risk more than 1-2% of total account value. It caps the damage any one trade can do, keeping individual losses small enough that the account can absorb a losing streak without serious damage.
Position size (shares/units) = Dollar risk amount ÷ Risk per share. Dollar risk amount is your account balance times your chosen risk percentage; risk per share is the difference between your entry price and your stop-loss price. For example, a $50,000 account risking 1% ($500) on a stock with $5 of risk per share (entry $180, stop $175) works out to 100 shares.
Because percentage-based sizing automatically scales position size down as an account shrinks during a losing stretch, and back up as it recovers — keeping the actual risk-per-trade consistent relative to current account value. A fixed dollar amount per trade doesn't adjust, so it represents a growing percentage of a shrinking account exactly when risk should be getting more conservative, not less.
At 1% risk per trade, a run of 20 consecutive losses reduces the account by roughly 18-20% (slightly less than 20% since each loss is calculated on a progressively smaller balance) — painful but recoverable. At 2% risk per trade, the same losing streak causes proportionally more damage, illustrating why many risk-management guidelines cap risk per trade at 1-2% rather than higher.