GLOSSARY // Risk & Psychology
Position Sizing
Position sizing is the calculation that decides how many shares or contracts to trade so that a losing trade costs a fixed, predetermined slice of the account. The formula: shares = dollar risk per trade / (entry price - stop price). Size is an output of the stop distance, never a number picked first.
The most common scheme is fixed-fractional: risk the same percentage of equity on every trade, typically 0.5-2%. At 1% risk, it takes 10 straight losses to give back 10% of the account, which keeps any single idea from mattering too much. Traders who size by feel end up with their biggest positions in their most emotional trades.
A trader with a $25,000 account risks 1% per trade, or $250. Entry is $40.00, stop is $38.75, so risk per share is $1.25. Shares = $250 / $1.25 = 200 shares, an $8,000 position. If the same setup had a wider $2.50 stop, the size drops to 100 shares — the dollar risk stays $250 either way.
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Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.