RS Trader Academy

Schools / School II — Risk First / Course 3

Position sizing: a short division problem

After this lesson you can compute the correct number of shares for any trade in your head, from three numbers you already have.

The formula

You have R (course 2), and before every entry you'll have a stop (course 5 makes a lesson of it; for now, take it as given that you know your exit price before you buy). Position size falls out of those two numbers by division:

shares = R ÷ (entry price − stop price)

That's the whole formula. €10,000 account, 1% risk, so R = €100. You want to buy at €40 with a stop at €38: €100 ÷ €2 = 50 shares. Position value 50 × €40 = €2,000. When the division isn't exact, round down to whole shares. 27.4 becomes 27, because rounding up would put you over R, and R is supposed to be a ceiling.

Notice that your confidence in the trade appears nowhere in the formula. There's no term for it, and that's deliberate: sizing up because a setup feels especially good is the usual route from a strong opinion to an oversized loss.

The part people find strange

Same account, same R. Two trades:

The tighter stop produced a position four times as large, and both trades risk exactly €100. Most beginners expect the opposite, because a bigger position feels riskier. In this school, though, "risk" always means the euros lost if the stop is hit, and that number is pinned at one R by construction. What's left free to vary is the share count, and the stop distance is what sets it.

It works in reverse too, as a warning. When a trade needs a wide stop, the formula hands you a small position. That's the formula doing its job: the wide stop is telling you this trade can go far against you before you're proven wrong, so you carry less of it.

The cap

The division can ask for more money than you have. Entry €40, stop €39.80: €0.20 per share of risk, so the formula says 500 shares, which is a €20,000 position on a €10,000 account. The formula is right about the risk, and you still can't buy it. (Brokers will happily lend you the difference. School II's stance is that you don't borrow while learning: margin stacks a second arithmetic on top of the drawdown table from course 1, and you don't need that yet.)

So the sizing rule gets a second line: position value may not exceed a fixed share of the account, with 25% a common choice. When the cap binds, you buy fewer shares than the formula asks for and the trade ends up risking less than a full R, which is fine.

Who actually does this

Every serious fund knows, for every position it holds, exactly how much money is gone if its exit level trades, because sizing ran through this same division, usually with more decoration. Retail mostly runs it the other way round: pick an amount to spend, buy that many shares, and find out afterwards what the loss turned out to be. You'll be in the first group from your first paper trade, because the Arena asks for the size calculation before it logs the entry.

Check yourself

  1. R = €150. Entry €25, stop €24. How many shares, and what's the position value? (150 shares, €3,750.)
  2. R = €100, account €10,000 with a 25% cap. Entry €80, stop €79.60. What does the formula say, and what do you do? (It says 250 shares = €20,000. The cap limits you to €2,500 ≈ 31 shares, risking about €12.40. Take that or skip the trade; widening the stop to "make it fit" is backwards.)
  3. Two traders take the same setup with the same R. One uses a €0.50 stop distance, one €2.00. Who holds more shares? (The tighter stop holds four times the shares, and both traders risk one R.)

The habit this lesson installs

Compute the size from the stop, every trade.

Next: Course 4 — "Expectancy: what a system earns per trade."