How to calculate your position size
Ask most new traders how they decide how many shares to buy and the answer is some version of “whatever felt right” or “as much as I could afford.” Both are recipes for an oversized loss on a bad day. Position sizing replaces that guesswork with a simple rule: decide how much you’re willing to lose first, then let that decide the size.
Start with risk, not size
The mental shift is this — before you think about how much to buy, decide how much you’re prepared to lose if the trade goes against you. That amount is usually a small, fixed percentage of your capital, often 1% or 2%. This is sometimes called the “1% rule.”
The formula
There are three inputs you control and one the market gives you:
- Capital — total money in your trading account.
- Risk % — the slice of that capital you’ll risk on this one trade.
- Stop distance — the gap between your entry and your stop-loss, which is your risk per share.
A worked example
Suppose you have ₹1,00,000 and you risk 1% — that’s ₹1,000 on the line. You plan to enter at ₹500 and place a stop-loss at ₹480, so your risk per share is ₹20. Dividing your ₹1,000 risk by ₹20 gives 50 shares. If the stop is hit, you lose exactly ₹1,000 — the amount you chose in advance.
| Input | Value |
|---|---|
| Capital | ₹1,00,000 |
| Risk per trade | 1% = ₹1,000 |
| Entry / Stop | ₹500 / ₹480 |
| Risk per share | ₹20 |
| Position size | 50 shares |
Why the stop distance matters so much
A tighter stop lets you buy more shares for the same risk; a wider stop forces a smaller position. This is the part that surprises people — a “safer” looking trade with a far-away stop actually means you hold fewer shares, because each share now carries more risk. The rupee risk stays fixed at ₹1,000 either way.
The real payoff
Sizing every trade to the same small risk does something powerful: it makes any single loss survivable. A string of losses becomes a manageable dip rather than a wipeout, which keeps you in the game long enough for your edge to play out. It also takes emotion out of the decision — the formula sizes the trade, not your mood.
This is general education, not investment advice. Position sizing manages risk on a trade you’ve already chosen; it doesn’t tell you what to trade. Rates and examples are illustrative.