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Position Sizing from Your Stop

intermediate7 min read

Let your stop distance and risk budget decide your quantity — not your conviction.

Position sizingDeciding how much to bet on each trade or holding. is the bridge that makes the 1% ruleNever risk more than ~1% of capital on a single trade. actionable: it answers “how many sharesA unit of ownership in a company. do I buy?” The answer comes from a simple formula, not from how confident you feel. This is where stops and risk budgetA plan for how you’ll spend and save your income. combine into a quantity.

The key mental shift: *your stopA pre-set exit that caps your loss if a trade goes wrong. distance determines your position size, not the other way around — and never your conviction. The formula is: *sharesA unit of ownership in a company. = (capital × risk%) ÷ (entry − stopA pre-set exit that caps your loss if a trade goes wrong.)**. First you decide your risk budgetA plan for how you’ll spend and save your income. (e.g. 1%) and your logical stop (from the chart). Those two fix your rupee risk and your per-shareA unit of ownership in a company. risk — and the quantity falls out automatically. A wide stop means fewer shares; a tight stop means more — so that every trade risks the same fixed amount regardless of the stock or your excitement. Conviction never sizes the trade; the math does. This is how pros keep risk constant across wildly different setups.
Example₹5,00,000 capital, 1% risk = ₹5,000. Trade A: entry ₹100, stopA pre-set exit that caps your loss if a trade goes wrong. ₹95 → ₹5 risk/shareA unit of ownership in a company. → 1,000 sharesA unit of ownership in a company. (₹1,00,000 position). Trade B: entry ₹100, stopA pre-set exit that caps your loss if a trade goes wrong. ₹80 → ₹20 risk/share → only 250 shares. Both risk exactly ₹5,000 despite very different position sizes — the wider stop forced a smaller position.
Common mistakeBuying a fixed number of sharesA unit of ownership in a company. (or a fixed rupee amount) regardless of stopA pre-set exit that caps your loss if a trade goes wrong. distance. That makes your actual risk swing wildly trade to trade — a wide-stopA pre-set exit that caps your loss if a trade goes wrong. trade can quietly risk many times your intended amount. Always size from the stop, so risk is constant.
Key takeawayPosition size = (capital × risk%) ÷ (entry − stopA pre-set exit that caps your loss if a trade goes wrong.). Your stopA pre-set exit that caps your loss if a trade goes wrong. distance — not your conviction — sets the quantity, so every trade risks the same fixed amount (wider stop = fewer sharesA unit of ownership in a company.). This is what operationalises the 1% ruleNever risk more than ~1% of capital on a single trade..
FAQs
What if the position size the formula gives feels too small?

That’s usually the formula protecting you — a wide stop *should* produce a small position. If it feels frustratingly small, the issue is often that your stop is far (low reward-to-risk); look for a setup with a tighter logical stop rather than overriding the math and oversizing.