Step 1 — Loss per share.
If you own 1 share and get stopped, you lose the stop distance:
loss per share=∣E−S∣=d
Why this step? Because your loss is literally the price you paid minus the price you sold at.
Step 2 — Loss for N shares.total loss=N×d
Why this step? Each share loses d, so N shares lose N times as much. Linear scaling.
Step 3 — Set total loss equal to your chosen risk R.
We want the loss (if stopped) to equal exactly R:
N×d=R
Why this step? This is the whole point — we're forcing the outcome, not hoping for it.
Step 4 — Solve for N.
And since risk is usually a % of account:
Capital check (never skip): the shares must actually fit your buying power:
cost=N×E≤available capital
If cost exceeds capital, you're capped by capital, not by risk (a very tight stop can demand more shares than you can afford).
R=\1000,d=$4,N=250 shares.
What does fixed \ exposure get wrong vs fixed $ risk? ::: Same exposure gives different risk when stop distances differ; only fixing R keeps risk constant.
Recall Feynman: explain to a 12-year-old
Imagine you're playing a betting game and you promise yourself: "I will never lose more than 2 chips on one round." Now, how far the game can go against you depends on where the "I quit" line is. If the quit line is close, one chip only loses a little, so you can put down many chips. If the quit line is far, each chip could lose a lot, so you put down fewer chips. You just divide your 2 chips by how much each chip could lose, and that tells you how many chips to play. That's exactly what traders do with money and shares.
Dekho, position sizing ka pura funda ulta hai jo log sochte hain. Aap pehle ye decide nahi karte ki "kitne shares kharidne hain" — aap pehle decide karte ho ki is ek trade me main maximum kitne rupaye lose kar sakta hoon. Ye risk amount R usually account ka 1% ya 2% hota hai. Maan lo account $20,000 ka hai aur risk 1% hai, toh R = \200$. Bas itna hi loss allowed hai, chahe kuch bhi ho.
Ab market aapko batata hai ki stop-loss kahaan lagega. Entry aur stop ke beech ka gap ko bolte hain stop distance, d=∣E−S∣. Ye har ek share pe hone wala loss hai agar stop hit ho jaye. Toh formula simple division hai: N=R/d. Total loss =N×d=R, exactly aapke plan ke barabar. Isiliye stop distance divisor hai, entry price nahi — kyunki loss to price ke against move pe depend karta hai, entry level pe nahi.
Ek important intuition: tight stop = zyada shares, wide stop = kam shares, lekin dono case me risk same rupaye hi rahega. Ye baat naye traders ko confuse karti hai, par ye hi asli beauty hai. Aur haan, shares hamesha neeche round karo (33.3 ko 33 karo), taaki actual risk plan se kam rahe, zyada nahi.
Last me ek check kabhi mat bhoolna: N×E aapke available capital se zyada nahi hona chahiye. Agar tight stop ki wajah se formula bahut zyada shares maang raha hai jo aap afford nahi kar sakte, toh capital ke hisaab se max shares lo — us case me aapka risk plan se automatically kam ho jayega, jo safe hai. Yehi ek habit long-term me aapko market me zinda rakhti hai.
