Ask ten traders how they decided how many shares to buy, and you'll hear nine answers built from feeling: "felt like a good size", "that's what I had free", "I always buy 100 shares of anything."
The tenth trader will show you a calculation.
Only the tenth trader is actually managing risk — because position sizing isn't a feeling. It's arithmetic, run in the same fixed order, every single time, regardless of how confident the trade feels. Chapter 1 told you why this matters more than stock-picking. This chapter gives you the formula.
Look at the figure — the machine has three inputs, run left to right, always in this order:
Input one: your account size. Not complicated — the capital you're actually trading with. Say ₹10,00,000.
Input two: your risk per trade. The percentage of that capital you're willing to lose if this ONE trade goes completely wrong. This is the number Chapter 1's two traders disagreed on — 1% versus 10% — and it's the single most consequential decision in this entire school. The standard professional range is 0.5% to 2% per trade. At 1%: ₹10,000 of risk. Fixed, before you even look at a chart.
Input three: your stop distance. The gap, in rupees, between your entry price and your stop-loss — the price at which you'll admit the trade was wrong and exit (Chapter 3 is entirely about placing this point correctly; for now, take it as given). Say you're buying at ₹500 with a stop at ₹480: a stop distance of ₹20 per share.
Now the formula that ties them together — memorise this, because it's the one calculation that belongs in every single trade you ever take:
POSITION SIZE = (Account Risk in Rupees) ÷ (Stop Distance per Share)
POSITION SIZE = ₹10,000 ÷ ₹20 = 500 shares
That's it. Not a guess. Not a gut feeling. Five hundred shares, because that's the exact quantity at which — IF the stop is hit — you lose precisely ₹10,000, precisely 1% of your account, no more, no less, regardless of whether the stock costs ₹50 or ₹5,000 per share.
Sit with the sentence at the bottom of the figure, because it inverts how most beginners think about sizing:
The stop decides the size. The size never decides the stop.
Beginners do it backwards: they decide 'I'll buy 500 shares' first — usually because that's what fits their capital, or what feels satisfyingly large — and only then look at where a stop 'makes sense'. That order guarantees your risk is random, different on every trade, decided by whatever quantity felt good that morning. The professional order is fixed: first find where the trade is proven wrong (the stop), then let the formula tell you the size that keeps that wrongness affordable. The trade's story decides the stop. The stop and your fixed risk % decide everything else.
Notice what this formula quietly does to expensive stocks and cheap stocks, index futures and small caps: it treats them identically. A ₹50 stock with a ₹2 stop and a ₹5,000 stock with a ₹200 stop produce the exact same position size for the same account risk, because both risk exactly ₹10,000 if wrong. Price per share is irrelevant. Risk per trade is the only number that matters, and the formula enforces that automatically — which is precisely why it replaces guessing.
One number now needs justifying: why 1%, why not 5%, why not 10% like Trader B? The honest answer is that it depends on your win rate, your typical reward-to-risk, and how many consecutive losses your strategy can realistically produce (Chapter 5 will show you the exact math — spoiler: 10 losses in a row is not a black-swan event, it's a Tuesday for many systems). For now, treat 0.5–2% as the professional's range and 10%+ as Trader B's range, and choose based on one honest question: how many trades like this one could go wrong in a row, and could I live with that at this size?
A word on the famous formula you may have heard of and should treat with real caution: the Kelly Criterion, a mathematical formula for the theoretically 'optimal' bet size given your edge and odds. It's elegant, and it's also dangerous in untrained hands — full Kelly sizing produces swings so violent that even a genuinely profitable strategy will feel like it's failing, and most humans abandon it at the worst possible moment (the Market Theories school's bent curve, arriving to ruin the mathematics). Professionals who use Kelly at all typically use a fraction of it — 'half-Kelly' or less. For everything in this school, the simple fixed-fractional formula above is the one to actually run. Sophistication is not the same as safety.
Two boxes filled — signal and size. Next, the box the whole formula depends on: where exactly the stop goes, and why 'wherever feels safe' is the wrong answer.
Key Takeaway
Position size = Account Risk (₹) ÷ Stop Distance (₹ per share) — run in that order, every trade, regardless of how the setup feels. The stop decides the size; the size never decides the stop. This formula makes price-per-share irrelevant and risk-per-trade the only number that matters. Professional range is 0.5–2% per trade; be wary of aggressive formulas like full Kelly, which are mathematically optimal and psychologically unbearable.
Think About It
Pull up your last five trades. For each, can you state the exact rupee risk you took — not the number of shares, the actual rupees at stake if the stop was hit? If you can't answer instantly, you weren't sizing. You were guessing with extra steps.
Risk Lab — Size Your Last Five Trades Properly
Take your last five real trades. For each, write down: entry price, actual stop you used (or should have used), and shares bought.
Now run the formula properly: pick a fixed risk % (start with 1%), calculate the CORRECT position size using your real account size and the actual stop distance, and compare it to what you actually bought.
For each trade, note: were you oversized, undersized, or accidentally correct?
Write one sentence: 'My actual sizing method has been ___.' If the honest answer is 'a feeling', you now have a formula. Use it on the next five trades and repeat the comparison.