How it works
Position sizing starts from the loss you are willing to accept if an idea fails, and works backwards to the number of shares, as the risk/reward and position size lesson explains.
Amount at risk = capital × risk per trade
Loss per share at the stop = distance from entry to stop + round-trip costs per share
Position size = amount at risk ÷ loss per share, rounded down to whole shares
Reward-to-risk ratio = distance from entry to target ÷ distance from entry to stop
Win rate needed to break even = loss per share ÷ (loss per share + gain per share after costs)
A stop below the entry is treated as a long trade; a stop above it as a short trade. The stop distance decides the size: a wider stop means fewer shares, a tighter stop more, while the amount at risk stays the same.
Worked example
Worked example: A made-up trade plan
Capital ₹5,00,000, risk 1% per trade, entry ₹310, stop ₹298, target ₹340, and round-trip costs assumed at ₹0.50 a share.
| Amount at risk: 1% × 5,00,000 | ₹5,000 |
|---|---|
| Loss per share at the stop: (310 − 298) + 0.50 | ₹12.50 |
| Position size: 5,000 ÷ 12.50 | 400 shares |
| Position value: 400 × ₹310 | ₹1,24,000, about 25% of capital |
| Gain at the target after costs: 400 × (30 − 0.50) | ₹11,800 |
| Reward-to-risk ratio: 30 ÷ 12 | 2.5 to 1 |
| Win rate needed to break even: 12.50 ÷ (12.50 + 29.50) | about 29.8% |
The plan risks 1% of capital if the stop works. It breaks even if just under three trades in ten reach the target first. Whether this plan reaches its target that often is a separate question that the ratio cannot answer.
Limitations
- The stop is a plan, not a guarantee. Prices can gap past a stop, so the real loss can be larger than planned.
- Costs are your estimate. Brokerage, charges, taxes and slippage vary; the result is only as good as the figure you enter.
- A ratio says nothing about probability. A high reward-to-risk ratio with a small chance of reaching the target can still lose money on average, as the expectancy lesson shows.
- Liquidity is not checked. A large position in a thinly traded share can be hard to exit at the stop.
This calculator illustrates risk arithmetic. It is not a suggestion to trade. SEBI's studies of past periods found that most individual intraday and derivatives traders lost money after costs, as the investing compared with trading lesson discusses.