Position sizing and R: how to decide how much to buy, and why it matters more than the entry

Position sizing is the answer to the question "how many shares to buy," and the correct answer doesn't start from the price but from the loss: you decide how much of your capital you're willing to lose if the stop is hit (say, half a percent), divide it by the distance between the entry and the stop, and get the number of shares. This loss is called R, and once it's fixed, every trade is measured in its units: a profit of 2R, a loss of 1R. This is the only language in which you can compare a trade in a 10-dollar stock to a trade in a 500 stock.

When we measured our engine's signals over two years, the exact same list of trades came out losing with a risk of one percent per trade and ten positions, and profitable with a third of a percent and fifteen. We didn't change a single signal. That's this entire page in one sentence.

The Calculator: Capital, Risk, Entry, Stop

Before the formula, the calculation itself. Your capital and risk percentage are saved in your browser; The full calculator page Adds examples, an R target, and the mistakes it doesn't prevent.

The formula, and its four numbers

Quantity = (Capital × Risk percentage) ÷ (Entry price minus stop price)Example: capital 100,000, risk 0.5% = 500; entry 50, stop 47, distance 3; quantity = 166 shares, position value 8,300. If the stop were at 49, the distance 1, the quantity 500 shares and value 25,000. Same risk in dollars, a threefold difference in size. Someone who buys "10,000 worth in every trade" risks a different amount each time without knowing it.

• Risk percentage per trade: The common rule is 0.25% to 1%. A percentage sounds small; a streak of ten losses, which happens, is already almost 10% of the capital, and such streaks break discipline right before the method recovers.
• Stop distance: Derived from the structure or fromATR, not from what's convenient. A tight stop increases the quantity and the chance of being stopped out by noise.
• Position cap: Maximum percentage of capital for a single asset, regardless of the stop. A very tight stop can yield a quantity that's half the portfolio; a gap down below the stop will turn that into a loss you didn't plan for.
• Number of parallel positions: 15 positions of 0.35% are 5% total open risk. Ten of 1% are 10%. The market falls on all of them together.

Why size can flip the sign

• Big losses require even bigger gains. After a drop of 20%, you need 25% to recover; after 50%, you need 100%. High risk per trade produces deep drawdowns, and deep drawdowns eat up whatever positive expectancy remains.
• Queue for positions. In a method with long trades, a small number of positions means the good trades arrive when there's no room. In the trailing-exit measurement we saw this in full: the runners took up the slots, and whatever came in their place lost.
• Costs versus size. A minimum commission on a small position can be the entire R. A size that's too small doesn't get traded at all, and that's a broker question, not a strategy question.
• Duplicates. Two ETFs on the same asset, or three stocks from the same sector, are one bet with three names. The real open risk is bigger than what the table shows.

How to start

Choose a risk percentage you can afford to lose ten times in a row without changing the rules. Calculate the quantity from the stop, on every trade, before placing the order. Set a cap on the asset and a cap on the number of positions, and don't exceed them even when the setup is "perfect." And log every trade in R, because only that way will you know after a hundred trades whether you have an edge or just luck. The stop andThe risk-reward ratio are the other two halves of the same rule.