The correct position size—how much stock you buy for a trade— is based on a formula, not how convinced we are a trade will work out.

In this article, I’ll discuss three methods for determining position size when trading stocks. The first is a formulaic allocation based on risk. We’ll call this the Percent Risk Method, and it is what I use for day trading.

The second method divides up available capital among how many stocks we are willing to hold. We’ll call this the Fixed Dollar Amount Method.

The third is a fusion of the two prior methods. It is what I use for swing trading. We’ll call it Fixed Dollar With a Twist.

Here’s a quick summary cheat sheet. More details are below.

The Percent Risk Method for Determining How Much of a Stock to Buy

To calculate position size, we need to know the amount of capital in our trading account, our entry price for a trade, and our stop loss price.

First , determine your Account Risk. This is how much of your account you’re willing to lose on one trade. I recommend 1% or less when starting out. Once you have proven yourself profitable over a long period of time, then you may choose to increase your risk to 1.5% or 2%, although if you are making money this isn’t required.

I typically risk only about 1% per stock trade.

Assume you have a $50,000 trading account. If you choose to risk 1%, then you can lose up to $500 per trade. That is your account risk.

Next, determine your Trade Risk. This is the dollar difference between your entry price and stop loss level (where you will get out if the trade doesn’t work out as expected). For example, if your entry is $125 and your stop loss is $120, then your dollar Trade Risk is $5.

Finally, divide your Account Risk (in dollars) by your Trade Risk (in dollars) to see how many shares you can buy.

If your acceptable account risk is $500, and your trade risk is $5, that means you can buy 100 shares. $500 / $5 = 100. If the stock costs $125 x 100 shares, then $12,500 is used to buy those 100 shares.

Here’s the position size formula:

Swing Trading Position Size (in shares) = Account Risk in dollars / Trade Risk in dollars

That’s it. That’s your position for the stock trade.

Here’s an example based on an explosive Cup and Handle trade that occurred in a Canadian stock. The top of the green box represents my target price. The bottom of the red box is my stop loss.

Charts from TradingView.

If you choose to risk 1.5% per trade, then multiply 0.015 by the amount of capital in your account to get the Account Risk. The same concept applies if you risk 0.5% or 2%.

Risk Rule: To avoid putting too much capital into one trade with very low Trade Risk, cap all positions that will be held overnight at 1/5 (or less) of the trading account capital.

In other words, no matter what the position size formula says, I don’t put more than 1/5 of my capital into any single stock trade which will be held overnight. For day trading, there is no overnight gap risk, so I will utilize my whole account on day trades (and even use leverage), but risk is still limited to 1% or less.

Stock prices can gap against us. So even though our trade risk may be very small on a particular trade, and thus the position size formula will allocate a lot of capital to that trade, we don’t want to put all our capital in a single swing trade.

This “percent risk” approach is common among day traders. It works ok for swing trading, but I like the Fixed Dollar with a Twist Approach better (discussed later)

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Fixed Dollar Method for Determining The Number of Shares to Buy

The fixed dollar method allocates a certain dollar amount to each stock trade.

Say you have a $100,000 account and want to allocate that capital between 5 different trades. That’s $20,000 per trade. Some traders will want to diversify a bit more and have up to 10 positions. Other swing traders may want to only focus on their best ideas, so they allocate their capital to only 3, 4, or 5 trades.

Day traders may put all their capital into a single trade (not overnight gap risk) or they may decide to put only a portion of their capital into each trade.

To find out how many shares you can buy, divide the dollar amount you are willing to allocate to each position by the stock entry price.

Assume you want to buy a stock that is currently trading at $25.25. Divide $20,000 (or however many dollars you are willing to put into the trade) by $25.25. You can buy 792 shares.

The chart below shows another example.

This method is most common among investors who are more “buy and hold” type investors and may not be placing a stop loss on their investments (although a stop loss and controlling risk is recommended).

Fixed Dollar Method with a Twist Position Sizing Method

I use the Fixed Dollar approach when swing trading, but with a bit of a twist.

I prefer to only hold about 5 or 6 trades at a time. That means I divide my account capital by 5. That is my base dollar amount I can allocate to each position.

I do this because it forces me to really pick the best trades ideas. I don’t want to own 20 stocks that are average. I want to own a handful of stocks that are doing amazing and that still look great. I want to put more capital into a few great ideas, not a little bit of capital into a bunch of mediocre ones. That’s just me. You have to decide what works for you, and what you are comfortable with.

Let’s assume the account has $50,000 in it. That means we can allocate $10,000 to each position. That is the baseline amount. Establish your own baseline amount based on your total capital and how many positions you ideally want to hold.

But not all trades are equal. Some trades have more risk than others.

My average stop loss is about 5% to 6% below my entry point, that is my trade risk in percent. Meaning if I buy a stock at $10, my stop loss may be around $9.40. I don’t randomly put my stop loss there, my stop loss just ends up often being close to 5% or 6% based on my strategies. See How to Swing Trade Continuation Patterns for loads of trade examples.

If my trade risk is near 6% or less on a trade then I will allocate the baseline amount of capital.

For example, assuming the $50K account split between 5 positions. I will allocate $10,000 to a trade with 6% trade risk or less. That means I could lose $600 (1.2% of the account). If the trade risk is less than 6%, less of the account will be at risk, but I will still use the $10,000 in capital.

But assume I find a volatile stock I want to trade and my stop loss needs to be placed 12% away from my entry point. That stock is twice as risky, so I will only allocate half the baseline capital, or $5,000. I then divided $5,000 by the entry price to determine how many shares to buy. In this way, I am still only risking $600.

If I am trading a calmer stock and my stop loss only needs to be 3% away, my risk is half of the baseline. You could technically double your position size, since you are only risking half of “normal.” I may increase my position size slightly, but I prefer to keep it near the baseline amount or less. We can never know what will happen in a stock. I don’t want to put a bunch of capital into a seemingly tiny risk trade, only to have it gap on me and lose a big chunk of the account.

As the risk varies from the baseline of 6%, I adjust the amount of capital I allocate to that stock so that I am risking roughly the same dollar amount or the same percentage of my account (around 1%). But don’t go much over the your baseline amount; that’s what makes this method different from the 1% method.

Here’s a chart showing how this works. I have used the same example as in the Fixed Dollar section, but here I have utilized the baseline amount and risk.

In the prior section, I said I typically only risk about 1% per trade, but now I am saying I may risk 6%…or 12%! Remember though, with this method, we are dividing up our risk among multiple trades. Also, the 1% of the account is Account Risk. The 6% or 12% is the difference between the stop loss and entry; that is Trade Risk.

If I allocate $10,000 of my $50,000 account, and risk 6% on that single trade, there is $600 at risk (0.06 x 10,000). $600 is 1.2% of the entire account balance of $50,000. So we are still only risking about 1% of our account, just like we were with the percentage risk model discussed prior.

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How Many Shares to Buy When Investing in Stocks

The Fixed Dollar or Fixed Dollar With a Twist methods work well for investing.

Decide how many different stocks or ETFs you want to be invested in. Divide your capital by this number. Invest that amount of money in each one (make sure the fees you pay on your investments aren’t killing your nest egg).

Adjust the amount invested in each stock based on how volatile it is. You may wish to allocate more capital to some stocks or ETFs and less capital to others. Make the approach systematic though. How much you invest should not be based on opinion.

I invest in a handful of ETFs in my retirement account. I allocate capital to each one each month. Or I will allocate my contributions to one ETF this month, and then the next month another ETF gets the contribution. The same concepts apply as discussed above.

How Many Shares to Buy When Day Trading Stocks

I use the same approaches as above for day trading, the only difference is that I’m willing to put all my capital into a single trade, and may even use leverage. This is because I don’t have the overnight risk present with swing trading or investing.

I calculate 1% of my account. That is how much I can risk per trade. I divide that amount by my stop loss price on the trade, and that is my position size.

The other option is to choose a dollar amount to put into each trade. This is a portion of the account capital. Divide the amount you will put into the trade by the share price. That is how many shares to trade. Also, make sure that your stop loss on the trade protects you from losing more than 1% of the account on the trade. You may even wish to limit the loss to 1% or less of the capital used for the trade (which is smaller than the account balance).

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Learn how to read market conditions, how to find potentially explosive trades, where to get in and get out, how to fine-tune trade selection, and how to manage risk.

Cory Mitchell, CMT

Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.