Position sizing is one of the most important concepts in risk management. It determines how many shares you should buy on any given trade so that if the trade goes against you, your loss stays within a predetermined limit. Without proper position sizing, even a good trading strategy can lead to devastating losses.

The formula is: Position Size = Dollar Risk / Risk Per Share, where Dollar Risk is your account balance multiplied by your risk percentage, and Risk Per Share is the absolute difference between your entry price and stop loss price. The result is rounded down to the nearest whole share.

For example, with a $25,000 account and 2% risk, you are willing to lose $500 on the trade. If you enter at $50 with a stop loss at $47, your risk per share is $3. That means you should buy 166 shares ($500 / $3 = 166.67, rounded down). If the stop loss triggers, you lose approximately $498 instead of an uncontrolled amount, keeping your account safe for the next trade.