Glossary
Position size
How many shares or contracts a trade uses, usually set so that a loss at the stop costs only a fixed slice of the account.
On this page
Position size is the amount of a security held in one trade, measured in shares, contracts or dollars. Choosing it well is one of the main levers of risk control: two traders with identical entries and exits can end up in very different places if one risks 1% of the account per trade and the other risks 15%. Position size decides how much a single wrong call can hurt.
How it works
A common method, fixed-fractional sizing, starts from the loss you are willing to accept and works backward. You pick a share of the account to risk, find the distance from the entry to the Stop-loss order, and divide.
Note that the position is about 21% of the account but the planned loss is only 1%. Exposure and risk are different numbers.
What to watch for
- Gaps. A stop limits the loss only if the stock trades through it. An overnight Price gap below the stop can produce a much larger loss than planned, so traders often size down ahead of earnings.
- Correlation. Five positions in five chip stocks, each risking 1%, behave more like one 5% bet.
- Leverage and options. With margin or options, a small price move can wipe out the whole position, so size by the maximum loss, not by the cash paid.
- Liquidity. A position that is a large share of a stock's daily volume may be hard to exit at the stop. See Slippage.
Sizing by a fixed percentage also shrinks positions after losses and grows them after gains, which slows a losing streak's damage.