Position sizing is the process of deciding how many shares, units, lots or contracts to trade. It starts from the monetary risk budget and the estimated loss on one unit if the idea is invalidated.
From unit loss to quantity
For a linear instrument, a simple form is:
theoretical quantity = risk budget / estimated loss per unit
Unit loss must reflect stop distance, point or tick value, multiplier, currency and estimated costs. The result is then rounded to a tradable increment and checked against liquidity, exposure and margin.
Available margin does not automatically determine size, and a stop order does not guarantee its execution price. See Position sizing for the full procedure and nonlinear instruments, and Trade size for the distinction among quantity, notional and margin.
Sources
- CME Group, Proper Position Size — Connects stop level, monetary risk budget, tick value and contract count.
- Investor.gov, Stop, Stop-Limit, and Trailing Stop Orders — Explains why a stop price does not guarantee the execution price.