Most people decide how many shares to buy by picking a round dollar amount: $5,000 here, $10,000 there. Position sizing turns that around. You decide first how much you are prepared to lose if the trade doesn't work, then let the distance to your exit point set the number of shares.
The idea in one line
Shares = amount you are prepared to lose ÷ loss per share if the stop is hit.
The "stop" is the price at which you would accept you were wrong and leave the trade. It should come from the chart or the reason for the trade (below a support level, below the low of a range, a price that would contradict your thesis), not from how much you want to lose. The size then adapts so that, wherever the stop sits, being wrong costs about the same.
A worked example
Say you have an account of A$25,000 and you are prepared to lose 1% of it on any one trade: A$250.
You want to buy a stock at $42.50 and would exit at $39.80 if it falls. That is a loss of $2.70 a share (6.4%).
Ignoring costs, 250 ÷ 2.70 = 92.6, so 92 shares. Always round down: rounding up would risk more than you meant to.
Now add brokerage
Your broker charges $9.50 a trade. You pay it to buy and again to sell, so a round trip costs $19 whatever the size. That $19 comes out of your $250 budget first:
- Budget left for the price move: 250 − 19 = $231
- Shares: 231 ÷ 2.70 = 85.6, so 85 shares
- Position value: 85 × $42.50 = $3,612.50, about 14% of the account
- Loss if stopped out: 85 × 2.70 + 19 = $248.50, just under the budget
If you had ignored brokerage and bought 92 shares, the loss at the stop would have been $267.40: 7% more than planned. On small accounts or tight stops, fees make a much bigger difference.
The break-even price is also worth knowing: with 85 shares and $19 of fees, the stock has to reach $42.73 before selling covers both fees.
Buying a US stock from an Australian account
Currency conversion adds two things: an exchange rate, and the fee your broker adds when it converts.
Suppose you buy a US stock at US$180 with a stop at US$171, your broker charges US$3 a trade and a 0.6% conversion fee each way, and one US dollar costs A$1.54 (an illustrative rate).
- Your A$250 budget is about US$162.30.
- Each share loses US$9 on the move, plus 0.6% of US$180 converted at entry and 0.6% of US$171 converted at exit: about US$11.11 a share in total.
- Take off the US$6 of brokerage: (162.30 − 6) ÷ 11.11 = 14.1, so 14 shares (about A$3,880).
- Loss at the stop: about US$161.50, or roughly A$249.
Notice that the conversion fee alone adds more than 20% to the loss per share here. It is a real cost of trading overseas shares, and easy to overlook.
Why a fixed percentage
Risking the same small fraction of the account on each trade does two useful things.
It keeps losing streaks survivable. Every trader has runs of losses. Ten losses in a row at 1% each leave you about 9.6% down. At 5% a trade, the same streak leaves you about 40% down, and getting back from a 40% loss needs a 67% gain.
It scales automatically. As the account grows, 1% is a larger dollar amount; after losses it shrinks, so you trade smaller exactly when things are going badly.
There is no correct percentage. Many traders use between 0.5% and 2%; what suits you depends on your circumstances, and this article isn't advice about any particular figure.
Things position sizing doesn't fix
- Gaps. A stop is an instruction, not a guarantee. If a stock closes at $41 and opens at $36 after bad news, a stop at $39.80 fills near $36, and the loss is larger than planned.
- Positions that move together. Five trades in five mining stocks, each risking 1%, can behave like one trade risking 5% when the sector falls.
- Very tight stops. A stop only a few cents away produces a huge position. Most people also cap the position's value at a share of the account (the calculator's "largest position allowed" field), and anything worth more than the account needs margin.
- Minimum trade sizes. On the ASX a first purchase of a stock usually has to be worth at least $500.
Checklist
- Decide where the stop goes for a market reason.
- Decide the most you will lose on the trade.
- Take round-trip fees (and conversion fees) out of that amount.
- Divide by the loss per share and round down.
- Check the position's value isn't more of the account than you are comfortable holding in one stock.