What it means
Size = money at risk ÷ (stop distance × value per unit). Place the stop first, then size; round down.
Example
$200 risk, entry $50, stop $48: 200 ÷ 2 = 100 shares.
In practice
Position sizing is what makes every trade cost the same when it fails. The stop goes where the chart says, and the size is adjusted to fit: a wide stop means a small position, a tight stop a larger one.
The method is the same in every market, only the unit changes. With $100 to risk and a 25-point stop on MNQ at $2 a point, each contract risks $50, so the size is two contracts.
What to watch for
Choosing the size first and then squeezing the stop to fit puts the stop where the market will hit it. Round down, and allow a little for slippage and fees.
Related terms
4 terms- Risk per tradeThe share of your account you can lose if a trade's stop is hit, usually 0.5% to 2%.
- Stop-lossSLThe price where your trade idea is proven wrong and you get out, placed as an order before you need it.
- LotA forex position size unit: standard 100,000, mini 10,000, micro 1,000 units.
- Micro futuresFutures contracts one tenth the size of the standard ones, so smaller accounts can size positions properly.