A Position Size Calculator is a tool traders use to determine the appropriate amount of a financial instrument (like stocks, forex, or commodities) to buy or sell, based on their account size, risk tolerance, and the trade’s stop loss level. This helps manage risk by ensuring that only a certain percentage of the trading capital is at risk in any trade.
Here’s how you can calculate position size:
1. Determine Your Risk Per Trade:
- Typically, traders risk a fixed percentage of their total capital on a single trade, often 1-2%.
- For example, if you have a $10,000 account and risk 1%, you’re willing to risk $100 per trade.
2. Set Your Stop Loss:
- Determine the stop loss level, the price at which you’ll exit the trade if it moves against you.
- The difference between your entry price and the stop loss price is the risk per unit.
3. Calculate Position Size:
- Position Size = (Account Risk) / (Risk per Unit)
- If you’re risking $100 and the difference between your entry and stop loss is $2, then Position Size = $100 / $2 = 50 units.
This calculation ensures that your losses are limited to your predefined risk, regardless of the trade’s outcome.