Risk Management / Position Sizing

Remember that no matter how great your strategy is, you can never be right 100% of the time.

The key to effective money management is to have a set of rules and only risk a percentage of capital on any “single” trade or investment. The  percentages I typically use are 1% – 3% of capital.

For example, if capital is $10,000, then 3%  risk means that I will risk $300 ( 3% x $10,000 ) on any single investment. So when investing in a stock like Bank of America (BAC), does this mean I can only buy $300 worth of shares? No.

Your risk (the amount you can lose) per investment is determined by where you place your stop-loss. Whenever I make any investment, I always place a stop-loss but, I never place a stop loss based on a random amount of loss. A stop loss can be based on a level in the mkt where price should have to violate that level to prove the trade wrong which is tied into Risk / Reward. I like to see price violated as evidence I am wrong, which comes into play when levels of support or resistance are violated. Stops can also be placed using a percentage of risk against capital. This calculator will populate that risk model however, you must play stops according to your style and level of risk and comfort. Risk may be too great using levels like a Mov Avg or a break of support. Here’s how it calculates using percentages .  Let’s assume I were to use a 3% risk against capital and want to buy 200 shares BAC at $10. How many shares can i buy and where would i place my stop loss?


$300 ÷ 1.50 = 200 shares

In other words, if your capital is $10,000:

  • You can afford to invest in 200 shares of BAC at $10 (stop-loss at $8.50)
  • Your position in BAC is $10 x 200 shares  = $2000.00
  • Your maximum risk = $1.50 loss per share x 200 shares = $300

Position Sizing Formula

Given that risk per trade is always fixed as a percentage of capital in this calculator (see above highlight), the number of shares one can afford to buy would be determined by where we place our stop-loss.

In any investment, first determine your entry price (trigger entry) and your stop-loss price (% loss or level in the market). You can then determine your position size using this formula:

Number of shares = (% Risk per trade x Capital) ÷ $ Risk per share

If you decide to risk the maximum of 3% of on each investment, then each position size would be approximately $2000 and you would only be able to take on ABOUT 5 investments at once.


Trading options applies all the same equations however the amount of stop loss I typically use is greater due to inherent volatility thus reducing the position size.

Here is an example:

Capital is the same $10,000, you can afford to risk $300 (3% x $10,000) on any single investment. So if you want to invest in GOOGL March 1200 calls does it mean you can only buy $300 worth of options? No.

Your risk (the amount you can lose) per investment is determined by where you place your stop-loss. The same way as we did with Equity!

So if we buy the calls at 3.00 per call and set a stop loss at 2.00

We use the 3% max risk per trade so take $300.00 divide it by the 1.00 stop loss amount which gives us 300.00 then divide by 100 as each contract is 100 shares resulting in 3 contracts.

Formula $300.00 / $1.00 = $300 / 100 = 3 contracts x 3.00 = $900.00 investment.

The Pos Calculator does all the #Doughmath click the link here;


it is located under trading resources and play around with it !

here is the link as well

So your $900.00 investment has a $300.00 Risk but still maintains the integrity of the 1.5-3% guideline on the overall portfolio