Definition
Position sizing is the rule that decides how many units of an instrument to hold in a single position. A common approach is fixed-fractional sizing, which sets the size so that the loss to a planned exit price equals a chosen percentage of account equity.
How it works
Under fixed-fractional sizing, quantity = (account equity × risk percentage) ÷ (entry price − stop price). The planned loss per unit is set by where the exit would sit, so a wider stop produces a smaller position and a tighter one a larger position. The result is rounded down to the instrument's tradable lot size.
Sizing controls how much a single idea can hurt the account, but total risk also depends on how many positions are open and how correlated they are. Several small risks that move together can behave like one large risk.
Formula / convention
Quantity = (Account equity × Risk %) ÷ abs(Entry price − Stop price), rounded down to the lot size
Illustrative example
Illustrative: an account of HK$500,000 risks 1% (HK$5,000) per trade. A fictional share is entered at HK$40.00 with a planned stop at HK$38.00, so the risk per share is HK$2.00 and the size is 5,000 ÷ 2 = 2,500 shares, a HK$100,000 position (20% of the account). If the price gaps and the exit fills at HK$36.00, the loss is 2,500 × 4.00 = HK$10,000, or 2%, not 1%.
What to watch for
A stop-based size limits risk only if the stop is executed near its level. Gaps, trading halts, thin liquidity and slippage can produce losses well beyond the planned amount, and a stop order does not guarantee an exit price.