Section 4 · Momentum Basics
Position Sizing
The one formula that determines how many shares to buy
Shares = Dollar Risk ÷ (Entry − Stop)
Position sizing is the mathematical link between your risk management rules and your actual trade execution. The formula is: Shares = Dollar Risk ÷ (Entry Price − Stop Price). Dollar Risk is your maximum allowable loss on this trade (e.g., 1% of your account). Entry Price is where you plan to buy. Stop Price is where you will sell if wrong. The result tells you exactly how many shares to buy so that if you're stopped out, you lose precisely your pre-defined risk amount — no more. Example: $10,000 account, 1% risk = $100 max loss. Entry at $50, stop at $48. Dollar risk per share = $50 - $48 = $2. Shares = $100 ÷ $2 = 50 shares. If you buy 50 shares and are stopped out at $48, you lose exactly $100 — 1% of account. This formula keeps your risk consistent regardless of stock price, volatility, or position size. Every professional trader uses a variation of this formula.
3 things to know
Formula: Shares = Dollar Risk ÷ (Entry Price − Stop Price)
Dollar Risk = your max loss per trade (e.g., 1% of account balance)
Wider stop = fewer shares; tighter stop = more shares — risk stays constant either way
Dive Deeper
Key vocabulary — tap each card
Practice
Position Size Calculator
Max Dollar Risk (1% of Account)
$100
Divide your max dollar risk by (Entry Price − Stop Price) to get your share count.
Did you know?
Back-testing studies show that consistent 1% risk-per-trade position sizing, combined with a 2:1 average reward-to-risk ratio and a 50% win rate, produces a positive expected value of +0.5R per trade — meaning the system is profitable in the long run even if you only win half your trades.
🧠 Knowledge Check
1 / 3Answer all questions correctly to unlock the next lesson
Your max risk is $100. Entry price is $50.00, stop at $48.00. How many shares do you buy?