This is a guest post by Cory Mitchell, CMT of tradethatswing.com.

Position Sizing isn’t random. It’s calculated based on ACCOUNT RISK (AR) and TRADE RISK (TR). A formula controls risk so we know exactly how many stocks, futures contracts, or forex lots to buy on a given trade. There are many ways to calculate position size. Here are a few simple ones:

Fixed % Risk Method

Step 1. Choose an AR% you wish to risk on a trade. 2% or less. 1% or less is preferred.

Step 2. Convert AR% to AR$, based on your account size. 

  • AR1% on a $10,000 account means you can risk/lose up to $100/trade.

Step 3. Determine TR$. This may vary by trade; it’s the difference between the entry and stop loss (SL) price. The SL is the exit point if the price doesn’t move in the expected direction. 

  • Entry at $15, SL at $14.25, means TR$ is $0.75.

POSITION SIZE = AR$ / TR$ = $100 / $0.75 = 133 shares

Fixed $ Allocation Method

Step 1. Choose the maximum number of trades you want to allocate your total capital to. If you choose 5, each trade gets a maximum of 20% of the capital. 4 trades, each gets 25%, and so on.

Step 2. Apply the SL to the trade. AR% should still be under 2%, ideally under 1% of the account.

  • $100K account spread over 5 trades, then $20k goes into each trade. Assume TR% is 7% (difference between entry and SL). 0.07 x $20K = $1400. That’s 1.4% of the $100K account, which is acceptable. If TR% is 15% the AR% risk exposure is too high. 0.15 x $20K = $3,000 or 3% of the account. 
  • Reduce capital allocation ($) until the AR% is below 2%, ideally 1% or below. If TR% is 15%, allocating $10K to it means overall account risk is now down to 1.5%, which is acceptable.

POSITION SIZE = Capital allocation ($) / purchase price

  • Assume $65 entry and $20K allocation = $20k / $65 = 307 shares

Using leverage? Use total buying power (TBP) not total capital. $100K x 2x leverage = $200K TBP.

Forex or Futures Sizing

Utilize the Fixed % Risk Method. Establish your AR% and covert to AR$. Determine the TR in pips or ticks/points and know the pip/tick/point value.
Assume $15,000 USD account. AR% is 1% (can lose up to $150), buying EURUSD at 1.1510 with an SL at 1.1498 (12 pips risk). Pip value is $10/standard lot.

POSITION SIZING = AR% / (TRpips x Pip Value)

  • $150 / (12pips x $10) = 1.25 standard lots. It’s standard lots because we used standard lots in the equation. Use micro lots ($1) for the position size in micro lots. This position size requires 10:1 leverage (1.25 lots is €125, with only $15K in the account.

You can follow Cory on Twitter at @corymitc and check out his website at tradethatswing.com.


Position Sizing Cheat Sheet
Image Created by Holly Burns

By Steve Burns

After a lifelong fascination with financial markets, Steve began investing in 1993 and trading his accounts in 1995. It was love at first trade. After more than 30 successful years in the markets, Steve now dedicates his time to helping traders improve their psychology and profitability. New Trader U offers an extensive blog resource with more than 4,000 original articles, online courses, and best-selling books covering various topics.