Position Size

Position sizing is the mechanic that connects your risk management rules to your actual trades. The formula is simple: divide your dollar risk per trade by your dollar risk per share (the distance from entry to stop). The output is your share count. This calculation makes position size a function of risk rather than a function of conviction, which is the correct way to think about it. Your conviction about a trade doesn't change the probability of the stop being hit — it just changes how much you want to be right. Sizing based on conviction leads to oversized positions on "high conviction" trades that still lose at whatever their base rate is.

The most common position sizing error is thinking about shares instead of dollars of risk. A trader who says "I'll buy 1,000 shares" without considering the stop distance is doing it backwards. 1,000 shares with a $0.20 stop is $200 of risk. 1,000 shares with a $2.00 stop is $2,000 of risk — a 10x difference in actual exposure from the same "position size." The clean approach is to define your dollar risk first ($400, or 1% of $40,000), then let that determine how many shares you can take given where your stop needs to be.

Consistency in position sizing is as important as the formula itself. If you size up on setups you "really believe in" and size down on "just testing the waters" trades, you're allowing your emotional state to influence risk exposure — and your best-conviction trades won't necessarily be your best trades. Over time, traders who size every trade consistently (same risk per trade regardless of how they feel about it) have more stable equity curves and better psychological footing because no single trade feels catastrophic. That consistency is the foundation of professional trading risk management.