The math
Position size is determined by risk, not by conviction. The formula:
Shares = (Account × Risk%) ÷ (Entry − Stop)
This guarantees that if your stop hits, you lose exactly the dollar amount you decided to risk — regardless of how volatile the stock is or how big a position you'd "feel" comfortable taking.
Why the 1-2% rule works
If you risk 2% per trade, you can be wrong 10 times in a row and still have ~82% of your account. Most successful systematic traders use 0.5-2% per position. The trap to avoid: sizing based on dollar amount or "I feel good about this one" rather than your stop distance.
What this doesn't account for
- Gap risk — overnight gaps can blow through your stop
- Slippage on illiquid stocks
- Correlated positions — five tech stocks isn't five independent bets
- Options or leveraged ETF nonlinear payoffs