Position sizing is the process of deciding how many shares or contracts to buy or sell in a trade based on your account size and how much you are willing to risk. Correct position sizing keeps any single losing trade from causing outsized damage to your overall trading capital, which is essential for surviving long term as a trader.

Most professional traders risk between 1% and 2% of their account capital on any single trade. Risking more than 5% per trade is generally considered aggressive and increases the chance of large drawdowns, while very small risk (under 1%) is conservative and suits risk-averse traders or beginners.

It first calculates your risk amount (account size × risk percentage), then divides that by the risk per share (the difference between your entry price and stop loss price) to get the maximum quantity you can buy while keeping your loss capped at the risk amount if the stop loss is hit.

A tight stop loss means a small risk per share, which allows you to buy a larger quantity for the same risk amount — but it also means the trade is more likely to be stopped out by normal price fluctuation. A wider stop loss reduces position size but gives the trade more room to move before being stopped out.