Position Sizing Formula
The formula
Quantity = Risk Rupees ÷ (Entry Price − Stop Loss Price). For options: use the premium paid per lot as the per-unit risk if stop is at zero. This one formula keeps risk fixed regardless of volatility or zone width.
Worked example
Risk budget: ₹2,000. Entry: ₹150. Stop: ₹140. Entry − Stop = ₹10. Quantity = ₹2,000 ÷ ₹10 = 200 shares. If the zone is wider (stop at ₹135, risk ₹15), the formula automatically gives 133 shares — a smaller size to compensate for the wider stop.
Why reverse-engineering is dangerous
If you pick a round-number size (e.g., 500 shares) first and then find the stop, you are letting ego or comfort drive position size rather than math. A wider stop on 500 shares may risk ₹10,000 when your budget is ₹2,000 — five times too much risk.
Options sizing
For bought options: Risk ₹ ÷ premium per unit = number of units. If premium is ₹50 and risk budget is ₹5,000, you can buy 100 units. The maximum loss is the full premium paid — so risk is known and capped.
Practice checklist
- Fix risk rupees = account size × risk % (1%/1.5%/2%)
- Measure Entry − Stop exactly (per share or per unit)
- Qty = Risk ₹ ÷ (Entry − Stop)
- Never adjust the stop to justify a larger quantity
Mistakes to avoid
- Picking a round lot size first, then working backwards — this makes risk variable
- Widening the stop to justify a bigger position — backward risk logic
- Not recalculating when switching from a narrow to a wide zone