Position Sizing: A Practical Guide

Position sizing answers one question: how many shares can be traded while keeping the planned loss within a defined rupee amount?

The basic formula

Risk per share = absolute difference between Entry and Stop Loss.

Quantity = floor(Maximum Risk ÷ Risk per share).

The floor operation matters because quantity must normally be a whole number and rounding upward could push risk above the chosen limit.

Example

Why quantity changes

A wider stop-loss distance creates more risk per share, so the allowed quantity becomes smaller. A tighter stop-loss distance creates less risk per share, so the mathematical quantity becomes larger. A tight stop loss should not be chosen merely to increase quantity; it should still reflect a meaningful trade invalidation level.

Common mistakes

• Rounding quantity upward.
• Ignoring slippage and charges.
• Using a stop loss that has no connection to the trade plan.
• Confusing maximum investment with maximum risk.