Position Sizing - A Key Component of Your Stock Trading Success

Using proper position sizing is one of the most important components of stock trading and investing.

It is an important element that falls under good money management and basically tells you "how much" or "what size" of a position to take when placing a trade.

This section will give you a general overview with some examples.

In addition to this page, you can find more free information on this topic on my other page here: Position Sizing Tips.

Keep in mind that this is a general explanation, there are more advanced techniques and concepts to learn that I will be explaining on other pages.

I will also discuss what happens when you do not include proper money management in your trading plan.



Let's say you have come to the conclusion that you would like to buy shares of MSFT stock and it is trading at $20.00 per share.

  • Trader Joe has $50,000 in funds in his trading account.
  • Trader Lisa has $100,000 in funds in her trading account.
  • A common rule of thumb is to risk 1-3% maximum on each trade. I'll be using 2% in my examples below.
  • Both traders use an 8% stop loss in their trading plan.

Trader Joe

  1. $50,000 in total funds x 2% maximum risk per trade= $1,000 maximum risk per trade
  2. $1,000 (max. risk) divided by 8 (% stop loss) multiplied by 100= $12,500 position size
  3. $12,500 divided by $20.00 (share price) = 625 shares to purchase.
  4. 625 shares purchased using an 8% stop loss, or $1.60 in this case (20 x 8%)= $18.40 stop loss.
  5. $1.60 x 625 shares = $1,000 max risk, assuming you can get out at exactly your stop loss setting.

Trader Lisa

  1. $100,000 in total funds x 2% maximum risk per trade= $2,000 maximum risk per trade
  2. $2,000 (max. risk) divided by 8 (% stop loss) multiplied by 100= $25,000 position size
  3. $25,000 divided by $20.00 (share price) = 1250 shares to purchase.
  4. 1250 shares purchased using an 8% stop loss, or $1.60 in this case (20 x 8%)= $18.40 stop loss.
  5. $1.60 x 1250 shares = $2,000 max risk, assuming you can get out at exactly your stop loss setting.

By figuring out how much money to use and how many shares to buy ahead of time, and following the stop loss rules in place, Trader Joe and Trader Lisa would have to have 50 losing trades in a row to wipe out their accounts.


Now let's see what happens without using proper money management. If Trader Joe takes his $50,000 and buys 2500 shares of MSFT at $20.00, and he sticks to his stop loss rules and has to sell at an 8% loss, he has now lost $4,000 in one trade. If he now has just 13 losing trades in a row, his account would be below zero!

In real life, the trader who uses too large a position size, will also be likely to let his losing trades turn into bigger losses than the original stop loss. This creates an even more wealth dissolving effect.

Consider the $50,000 trade that turns into a 25% losing trade, or $12,500. You now only have enough money to make it through 4 losing trades in a row and you are wiped out.

Be safe, use proper position sizing and learn as much as you can about Risk Management. It will save you from having to read horror stories that sound familiar to you.




Return From "Position Sizing" To "Risk Management"


Elliott Wave Videos

Learn to trade in the direction of the forecasted trend with this free video course. Click here to start watching: Free Elliott Wave Video Lessons

Free Newsletter Updates

Trading Resources

Stock Trading Software
Stock Trading Software
Stock Trend AnalysisStock Trend Analysis