Position sizing

Two traders take the exact same trade, with the exact same entry and stop. One risks 1% of their account; the other buys "as many shares as I can afford." A year later the first is still trading and slowly growing. The second blew up months ago. The trade was identical. The size was everything.

Position sizing is the least glamorous math in trading and, after the stop-loss, the most important number you'll ever calculate. It's the dial that turns "protect my capital" from a nice sentiment into an exact, mechanical share count — and it's the precise calculation the Lab does for you on every trade.

Last lesson, your stop told you where you're wrong. Position sizing answers the question that completes it: how many shares should I buy so that being wrong costs exactly what I intend? Those two decisions are a matched pair. The stop sets the distance; the size sets how much each point of that distance costs you. Together they lock your risk to a precise, chosen dollar amount — before you ever click.

The rule that makes this work is beautifully simple: risk the same small percentage of your account on every trade. The standard is 1%. That means if your stop gets hit, you lose 1% of your account — no more, no matter the stock, the price, or how far away the stop is. That fixed 1% is your "1R" from the expectancy lesson, now expressed in real dollars. Every trade risks one unit; every loss is capped at that one unit; and survival is guaranteed by arithmetic instead of hope.

Here's the entire calculation. Two inputs you already have — your account size and your stop distance — produce the exact share count:

Work it with a $10,000 account risking 1% — so your maximum loss is $100. Say you buy at $50 with a stop at $48. Your risk per share is $2 (Entry − Stop). So: $100 ÷ $2 = 50 shares. If price hits your stop, 50 shares × $2 = exactly $100 lost. Precisely 1%. Not a guess — a calculation.

Now watch the magic. Same $100 risk, but a more volatile stock needs a wider stop — say $4 away. Then $100 ÷ $4 = 25 shares. And a calm stock with a tight $1 stop? $100 ÷ $1 = 100 shares. Look at what stayed the same and what changed: your dollar risk is always $100 — the stop distance changes only the share count. This is the answer to the puzzle from last lesson. When the correct stop is far away, you don't tighten the stop to risk less — you buy fewer shares. Size flexes to the stop; risk stays fixed. The volatile stock and the calm stock cost you the identical 1%.

Risking a small, fixed fraction does three powerful things at once. First and most important, it guarantees survival through losing streaks. At 1% per trade, ten losses in a row leaves you down only about 10% — annoying, fully recoverable. At 10% per trade, ten losses in a row nearly wipes you out. Since even a great edge has ugly streaks (Lesson 6.1), the small percentage is what lets you sit through them and be there when the wins return. Second, it auto-scales: 1% of a growing account is a bigger position, 1% of a shrinking one is smaller — you automatically press when winning and pull back when losing, with no decision required. Third, it removes emotion from size — the number is computed, not felt, so fear and greed never get a vote on how big you go.

First, the formula in action — same account, same 1% risk, three different stops. The shares change; the risk never does:

And why the small percent is non-negotiable — the same 10-loss streak at 1% versus 10% per trade:

Put the last two lessons together and you have the survival engine complete: the stop defines where you exit, and position sizing guarantees that exiting there costs a fixed, tiny fraction of your account. No single trade — and no realistic streak of trades — can take you out. That's the whole ballgame of staying alive. What's left is to make sure the trades you survive to take are actually worth taking: that your winners are bigger than your losers. That's reward-to-risk, and thinking in R — the next lesson, and the one that turns survival into growth.