Position sizing: how many shares to buy

Most traders spend their time on entries and almost none on size. Yet size decides how much a mistake costs, how deep a bad month goes and whether you are still trading next year. Two traders with identical entries and exits can end a year in very different places because of size alone.

Start from the loss you accept

The usual habit is to decide what to spend: ₹50,000 on this one, ₹1 lakh on that one. The trouble is that each of those positions then risks a different amount. A stock with a stop 3% below the entry loses ₹1,500 on ₹50,000. One with a stop 12% below loses ₹6,000 on the same ₹50,000.

Sizing from the stop flips the question. First decide what a failed trade may cost, say 1% of a ₹5 lakh account, which is ₹5,000. Then divide by the distance to the stop.

Shares = (account × risk per trade) ÷ (entry − stop)

With an entry at ₹500 and a stop at ₹470, the risk per share is ₹30. ₹5,000 ÷ ₹30 = 166 shares, about ₹83,000 of stock. If the stop is hit you lose ₹5,000, as planned, before charges.

Why this makes your record readable

When every trade risks the same amount, call it 1R, results can be compared. A trade that made ₹15,000 on ₹5,000 of risk is a 3R win. Average your wins and losses in R and you have the numbers that tell you whether your rules have an edge, which the guide to expectancy explains.

Two limits worth adding

A cap on any one position. A tight stop makes the formula ask for a huge position. A cap such as 25% of the account stops one stock from becoming the whole portfolio.

A stop based on volatility. A stop a fixed 5% away is too tight for a jumpy stock and too loose for a quiet one. Setting it a multiple of the average daily range (ATR) below the entry fits the stop to the stock, and the formula then sizes quiet stocks bigger and jumpy ones smaller.

How much to risk

There is no right number. More risk per trade grows a winning account faster and digs deeper holes in a losing stretch. Many swing traders settle between 0.25% and 1%. The drawdown tables show what a run of ten losses does at each level. At 1% it costs under 10% of the account, and at 5% it costs 40%.

One thing the formula cannot protect against is a gap. A stock that opens far below your stop fills far below it, so the real loss on that day is bigger than 1R. Smaller size is the only defence.