Position sizing is the decision about how much to trade: how many shares to buy, how many futures or option lots to sell, how much of your money one idea is allowed to use. Most beginners spend all their time on what to buy and when. Experienced traders spend at least as much time on how much, because the size of a position decides whether a wrong idea is a small cut or a disaster.
The idea is simple. Before you enter, you decide how much money you are willing to lose if the trade goes wrong. Then you size the trade so that, if your exit point is hit, you lose about that amount and no more.
Position size = money you accept losing ÷ loss per share (or per lot) at your stop-loss
Why size matters more than most people think
Suppose two traders each have ₹5,00,000 and take the same ten trades. Both are right on five and wrong on five. The first risks ₹5,000 on each trade (1% of capital). The second, feeling confident, puts most of the account into each idea and risks ₹50,000 a trade (10%). After a run of five losses in a row, which happens to everyone sooner or later, the first trader is down about ₹25,000 (5%) and can carry on calmly. The second is down about ₹2,50,000 and has lost half the account. To get back to where they started, the second trader now needs a 100% gain.
That last point is the maths that makes position sizing so important. Losses and gains are not symmetric:
| Loss on the account | Gain needed to get back to the start |
|---|---|
| 10% | 11% |
| 20% | 25% |
| 33% | 50% |
| 50% | 100% |
| 75% | 300% |
Small losses are easy to recover. Big losses are very hard. Position sizing keeps every single loss in the easy part of this table.
The fixed-percentage method, step by step
The most common approach is to risk a fixed percentage of your trading capital on each trade. Many traders use a figure between 0.5% and 2%. There is nothing magic about these numbers; the point is to pick one that lets you survive ten or fifteen losses in a row without real damage, and to apply it every time.
- Decide your capital. Only the money set aside for trading, not your savings or emergency fund. Say ₹5,00,000.
- Decide the risk per trade. Say 1%, which is ₹5,000.
- Find your stop-loss, the price at which the idea is clearly wrong. This comes from the chart, not from your wallet (see the stop-loss guide).
- Work out the loss per share: entry price minus stop price.
- Divide. Money at risk ÷ loss per share = number of shares.
Worked example with a stock. You want to buy Reliance Industries at ₹1,400 and the chart says the idea is wrong below ₹1,365. The loss per share is ₹35. With ₹5,000 at risk, you can buy 5,000 ÷ 35 ≈ 142 shares, about ₹1,98,800 worth. If the stop is hit you lose about ₹5,000 plus costs. If instead the stop had to be at ₹1,330 (₹70 away), the same rule gives only 71 shares. A wider stop means a smaller position; the money at risk stays the same.
Notice that the position value (₹1,98,800) is far larger than the risk (₹5,000). Position sizing is about the loss if you are wrong, not about how much money the trade uses.
Using live indicator levels to place the stop
Levels such as the 50-day average, the Supertrend line and the pivot support (S1) are common places for a stop, because a break below them often means the setup has failed. Here are those levels for Reliance Industries as of the latest update:
Take the distance from the current price to whichever level you would use as a stop, and that is your loss per share for the formula above. A stock far above its Supertrend line needs a smaller position than one sitting just above it, if you use that line as your exit.
Sizing futures and options: lots change everything
In futures and options you cannot buy 142 units. You trade in lots, a fixed number of units set by the exchange (check the current lot size on NSE, it is revised from time to time). One lot of NIFTY moves by the lot size × the points moved, so even one lot can be a big position for a small account.
Suppose, as a made-up round figure for this example, one NIFTY lot is 75 units. A 100-point move against one lot of NIFTY futures is 75 × 100 = ₹7,500. With ₹5,00,000 of capital and a 1% rule (₹5,000), a stop more than about 66 points away on one futures lot already breaks the rule. The honest answer is sometimes that the account is too small for that trade, and the right size is zero.
For an option buyer the sizing is easier to see: the most you can lose is the premium paid. If a NIFTY call costs ₹120, one lot costs 75 × 120 = ₹9,000, and that whole amount is at risk. Under a ₹5,000 rule you would need a cheaper option, a stop on the premium, or no trade.
For an option seller, the premium received is not the risk. A sold option can lose many times the premium on a sharp move, so the sizing must be based on a realistic bad move, not on the margin your broker blocks. See lot size and margin for options.
A live example: sizing against the expected move
A practical way to judge how far NIFTY might travel is the options market's own estimate, the expected move: NIFTY plus or minus the at-the-money straddle price. Here it is now:
Read the "Expected move" figure as points NIFTY may cover by expiry. Multiply it by the lot size and you have a rough rupee swing per lot for a position held to expiry. If that number is larger than the loss you accept on one trade, a short option or futures position held to expiry is too big for the account, unless you hedge it or use a tighter exit. The expected move is a guide, not a ceiling: on event days the market often moves further.
The live straddle itself shows how much the options market is charging for that movement through the day:
When the straddle line rises quickly, the market is pricing more movement, and the same number of lots carries more risk than it did in the morning.
Other sizing methods
- Volatility-based sizing. Use the Average True Range (ATR) to set the stop, for example 1.5 or 2 ATRs from entry. Volatile stocks get smaller positions automatically. See ATR explained.
- Fixed amount per trade. The same rupee value in every trade. Simple, but it ignores where the stop is, so the risk varies a lot from trade to trade.
- Total exposure limits. On top of risk per trade, many traders cap the total open risk (say no more than 5% to 6% of capital at risk across all open positions), and avoid several trades that are really the same bet, such as three banking stocks and a BANKNIFTY call at once.
Common mistakes
- Sizing by margin. The margin your broker blocks is not your risk. A position can lose far more than its margin in a fast market.
- Raising size after losses to win it back. This is how small drawdowns become big ones. The trading psychology guide covers why this urge is so strong.
- Raising size after a winning streak. Confidence is not information. Increase size slowly, as capital grows, using the same percentage.
- Forgetting gaps. A stop-loss does not protect you overnight. A stock can open far below your stop after bad results, so overnight positions deserve smaller sizes.
- Forgetting costs. Brokerage, taxes and slippage are part of the loss. On small intraday targets they can be a large share of it; see trading costs.
You can practise sizing with no money at risk on the paper trading page: decide the stop, work out the size with the formula, and record what happens.