Position sizing is the process of deciding how many shares, contracts, or units to trade so that the loss at the stop level equals a planned fraction of the account. It is the mechanism that converts “I risk 1% per trade” from a slogan into a number of shares.
The standard method is fixed-fractional risk: choose a risk percentage, multiply by account equity to get the dollar risk, then divide by the stop distance per unit. The size therefore changes with every trade — tighter stops allow larger size for the same dollar risk, wider stops force smaller size.
Sizing is where most blow-ups actually happen. A strategy with a genuine edge still fails if individual losses are large enough that a normal losing streak digs a hole the win rate cannot climb out of; small, consistent risk per trade is what keeps drawdowns survivable.
A $10,000 account risking 1% ($100), entry $40, stop $38 ($2 risk per share): $100 ÷ $2 = 50 shares.