Someone asked me last week how many shares they should buy. I asked what their stop was. They didn't have one yet. They had a feeling about the stock — strong feeling, they said, twice — and no number for where they'd be wrong. That conversation ends the same way every time. Without a stop, there's no size. There's just a guess wearing a share count.
Position size isn't about conviction. It's not how much you want to win, how confident you feel, or how much cash happens to be sitting in the account. It's the output of two numbers you already have before you click buy: what you're willing to lose in dollars, and how far price has to travel to prove you wrong. Divide one by the other. That's the whole method.
The formula
Shares (or contracts, or lots) equals your dollar risk divided by your stop distance. Dollar risk is a fixed number you set once, usually a percentage of your account — 1% is standard, some go lower. Stop distance is entry price minus invalidation price, in dollars, per share.
Position size = Dollar Risk ÷ (Entry − Stop)
That's it. No adjusting for how the chart "looks." No sizing up because you're sure this time. The stop distance comes from the chart — a level that's held before, and the price at which it would have clearly failed. The dollar risk comes from your account. Neither number cares about your opinion.
Why the level has to come first
I mark my levels before I'm in anything. Support here, resistance there, drawn from where price has actually stopped in the past — not where I think it should stop. That means by the time I'm considering a trade, the invalidation point already exists. It was there before the idea was.
That ordering matters more than it sounds like it should. If you decide your stop after you're already in the trade, you're deciding it with money on the line, and a number chosen under pressure tends to drift toward wherever keeps the position alive. If the stop exists because a level failed to hold, it's not a feeling. It's a fact about the chart you can point to. Position size just rides on top of that fact.
Worked example one: the tight stop
Account size: $8,000. Risk per trade, decided in advance: 1%, which is $80.
The setup: a stock has held support at $54.00 three separate times over two weeks. You're watching for a bounce off that level. If price closes below $53.60, the level is broken and the idea is wrong. Entry at $54.00, stop at $53.60. That's a $0.40 gap.
$80 divided by $0.40 is 200 shares. Buy 200. If the stop hits, you lose exactly $80 — 1% of the account, the number you picked with nothing open, over coffee, calm. If the level holds and price runs to $55.20, you're up $240 on the same 200 shares. The size never changed mid-trade. It didn't need to.
Worked example two: the wide stop
Same account, same $80 risk. Different setup — this one's messier. The stock has been choppy, and the only level that's actually held with any consistency is $1.80 below where you'd enter. Entry at $22.00, invalidation at $20.20.
$80 divided by $1.80 is 44 shares, rounded down. Notice what happened: the risk didn't change, but the position got smaller — a lot smaller than the first example — because the distance to being wrong is wider. This is the part people skip when they're excited about a trade. A wide stop isn't a reason to risk more dollars. It's a reason to buy fewer shares, so the dollar risk stays the same $80 either way.
This is also where the "I like this one, I'll just buy more" instinct gets expensive. Buy 200 shares against a $1.80 stop and you're not risking $80 anymore. You're risking $360 — 4.5% of the account — because the size didn't track the distance.
Worked example three: a smaller account, a level that barely moves
Account size: $2,500. Risk per trade: 1%, or $25. A tighter budget forces the arithmetic to show its teeth.
The setup: resistance-turned-support at $9.40 on a lower-priced name, holding by $0.15 on each retest. Entry at $9.40, stop at $9.25.
$25 divided by $0.15 is 166 shares. At $9.40 a share that's roughly $1,560 of capital in play — over half the account — for $25 of risk. That number can look alarming until you separate two things that get confused constantly: capital deployed and capital at risk. You're not risking $1,560. You're risking $25. The rest of that money comes back to you the moment you exit, win or lose, unless the stock gaps through your stop overnight, which is its own separate risk and the reason some traders size down further around earnings or news.
What changes the size, and what shouldn't
Two things move the number: your account balance and your stop distance. Nothing else is supposed to touch it. Not how the last trade went. Not a hunch that this one's different. Not the fact that you've been right three times this week and feel entitled to a fourth.
A tighter stop, closer to the level, buys you more shares for the same dollar risk. A wider stop buys you fewer. That trade-off is automatic once you commit to the formula, and it quietly kills two habits at once — the habit of oversizing a trade because it "feels safe," and the habit of avoiding a good setup because the position looks too small to matter. If the size is small, it's because the stop is wide. Take the trade anyway, at the size the math gives you, or don't take it. Don't override the arithmetic to make it feel more significant.
Where this breaks down
The formula assumes your stop actually gets filled near where you placed it. It doesn't protect against a gap — price opening the next day well past your invalidation point with no chance to exit at $53.60 or $20.20. That's a real risk, especially overnight or around news, and no amount of correct division fixes it. Some traders size down further for anything holding through a catalyst. Some avoid holding through one at all. Neither choice is the formula's job — the formula only does what it says, which is keep your planned loss equal to your actual loss when the stop fills where you expected.
It also doesn't make the level correct. A support line that's held three times can fail a fourth. Sizing properly means a failed idea costs you $80, not that ideas stop failing.
Where this leaves the math
I don't think about position size while I'm in a trade. I think about it once, before the level even gets tested, sitting with a fixed risk number and a chart that already tells me where I'd be wrong. By the time price arrives at the line, the size was decided long before — the same way the stop was. There's nothing left to feel about it. Just a number, and whether the level holds.
I run through this kind of math live in Static, the free daily chart room for Draw Lines Make Money. If seeing it worked out on real charts, in real time, would help it stick, you can sit in and watch:
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