Position Sizing & the 2% Rule

In one line: Decide how many shares to buy by how much you can lose, not by how much you can afford or how sure you feel.

🎯 What you'll learn

• What position sizing (deciding how many shares to buy) really means.
• The 2% rule (never risk more than 2% of your money on one trade).
• A simple formula to find the right number of shares.
• Why a wider stop means a smaller position, not a bigger loss.

📘 Key concepts

What is position sizing?

Position sizing is just answering one question: "How many shares should I buy?"

• It is like buying vegetables in a bazaar with a fixed budget. You do not buy so much that one bad brinjal ruins your whole week.
• A position is the shares you hold in one stock.
• Sizing by risk means you first decide your maximum loss, then work backwards to the share count.

The 2% rule

The 2% rule says: on any single trade, risk only 1% to 2% of your total account (all the money in your trading account).

• Risk here means the money you lose if the trade goes wrong and your stop is hit.
• A stop-loss (or "stop") is a price where you sell to cut the loss. Chapter 46 covered this.
• Small, fixed risk keeps you in the game. Even 10 losses in a row cannot wipe you out.
• Beginners should start at 1%. It is gentler while you learn.

The formula

Two easy steps. Use a calculator, no shame in it.

• Step 1 — Risk amount = Account size × Risk %
• Step 2 — Number of shares = Risk amount ÷ (Entry price − Stop price)
• Entry price is where you buy. Stop price is where you sell if wrong.
• The gap between them is your risk per share (loss on each share if the stop hits).

🔍 Example

You have an account of ₹1,00,000. You use the 2% rule.

Trade A — normal stop

• Risk amount = 1,00,000 × 2% = ₹2,000 (your max loss)
• You buy at ₹100, stop at ₹90.
• Risk per share = 100 − 90 = ₹10
• Shares = 2,000 ÷ 10 = 200 shares
• Position value = 200 × 100 = ₹20,000

Buy 100 ─────────── Stop 90
        gap = 10/share
        2000 / 10 = 200 shares

Trade B — tighter stop

• Same ₹2,000 risk. Same buy price ₹100.

• But stop is at ₹95, so risk per share = 100 − 95 = ₹5

• Shares = 2,000 ÷ 5 = 400 shares

• See the trick? A tighter stop lets you buy MORE shares for the same ₹2,000 risk.

• A wider stop means FEWER shares. Your loss stays ₹2,000 either way.

• The stop distance changes the share count, never your money at risk.

⚠️ Common mistakes

• Buying by feeling. "I feel sure" is not a number. Confidence does not size a trade; risk does.
• Buying all you can afford. Having ₹1,00,000 does not mean putting it all in one stock.
• Ignoring the stop. Without a stop price, the formula cannot work and losses have no limit.
• Widening the stop to buy more. Move the stop only for real chart reasons, then re-do the maths.
• Risking 10% or more per trade. A few losses in a row can then destroy the account.

✅ Key takeaways

• Size every trade by risk, not by confidence or by how much you can afford.
• Risk only 1% to 2% of your account on one trade.
• Risk amount = Account × Risk %. Shares = Risk amount ÷ (Entry − Stop).
• A wider stop = fewer shares. A tighter stop = more shares. Loss stays fixed.
• This one habit keeps any single loss small and survivable.

📝 Quick check

1. Q: Your account is ₹50,000 and you risk 2%. What is your max loss on one trade? A: ₹50,000 × 2% = ₹1,000.
2. Q: You buy at ₹200 with a stop at ₹180 and can risk ₹1,000. How many shares? A: Risk per share = 200 − 180 = ₹20. Shares = 1,000 ÷ 20 = 50 shares.
3. Q: If you move the stop closer to the buy price, do you buy more shares or fewer? A: More shares, because the risk per share is smaller. Your total risk stays the same.

📖 New words

• Position sizing — deciding how many shares to buy for one trade.
• Position — the shares you currently hold in a stock.
• Account size — the total money in your trading account.
• Risk (per trade) — the money you lose if the stop-loss is hit.
• 2% rule — never risking more than 1–2% of your account on a single trade.
• Risk per share — the loss on each share, equal to entry price minus stop price.

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Educational content only — not financial advice. Trading involves the risk of losing money.