Definition
Position sizing is deciding how many units to buy or sell in a trade so that the loss, if the stop-loss is hit, equals a planned share of the account. It controls risk per trade rather than predicting the outcome.
How it works
The common method starts with the amount at risk, usually a fixed percentage of the account: amount at risk = account size × risk %. Next comes the distance to the stop-loss: risk per unit = entry price − stop price for a long trade, reversed for a short. Then position size = amount at risk ÷ risk per unit, and position value = position size × entry price.
This means the stop-loss decides the size, not the other way round. A wide stop leads to a smaller position and a tight stop allows a larger one, while the money lost at the stop stays the same. Keeping the percentage fixed also shrinks positions after losses and lets them grow after gains, which slows down how fast a losing streak damages the account.
Leverage does not change the calculation; it only changes how much margin the position needs. The planned loss can still be exceeded if the price gaps past the stop, if a stop-market order fills with slippage, or if fees are left out. Position size can also be capped by liquidity or by a rule on how much of the account may go into one asset.
Example (hypothetical numbers)
Suppose a $20,000 account risks 2% per trade and plans to buy Token X at $80 with a stop-loss at $75.
Amount at risk = $20,000 × 2% = $400; risk per unit = $80 − $75 = $5.
Position size = $400 ÷ $5 = 80 units, worth 80 × $80 = $6,400, or 32% of the account.
If the stop is hit, the loss is about 80 × $5 = $400 before fees and slippage, even though $6,400 was in the trade.
The stop distance and the risk percentage, not the account size alone, set how large the position is.
Common mistakes
- Choosing the number of units first and then placing the stop wherever the loss feels acceptable.
- Confusing the amount at risk with the position value or with the margin used.
- Ignoring gaps, slippage and fees, which can make the real loss larger than planned.
Related calculators
This glossary is for education only and is not investment advice. Examples use hypothetical numbers.