Position sizing works out a quantity from three numbers you supply: how much you are willing to risk, and two prices. Risk : reward compares the distance from one price to a third with the distance to the second. Both are division, and nothing else.
Definition and Formula
The arithmetic runs in two steps. First the risk amount is settled — either stated directly in rupees, or as a percentage of a capital figure. Then the per-unit risk is taken as the distance between the two prices supplied, and the risk amount is divided by it.
The result is rounded down to a whole number. Part units cannot be bought. Rounding up would place the position above the limit that was stated, which would empty that limit of its meaning.
Rounding down also makes the actual risk slightly smaller than the amount stated. This site prints both figures. A page that shows only the stated amount is showing a number that does not apply to the units beside it.
Risk : reward is a second, separate division. One distance runs from the entry price to a third price. It is divided by the distance from the entry price to the stop-loss price. A ratio of 1 : 2.40 states that one distance is 2.40 times the other.
Every input here is supplied by the reader. This site puts forward no capital figure, no percentage, and no price for any of the three fields. The page performs the division and prints the result.
The capital figure is also a choice rather than a fact. This might mean the whole account. It might mean the part set aside for one kind of position, or something else entirely. Which one it means is decided before the arithmetic starts. The same percentage applied to two different capital figures produces two different quantities.
Formula: Risk amount = capital × risk% ÷ 100 · Unit risk = |entry − stop loss| · Quantity = FLOOR(risk ÷ unit risk) · Ratio = |third price − entry| ÷ unit risk
A Worked Example
| Capital (₹) | 5,00,000.00 |
|---|---|
| Risk limit (%) | 1% |
| Entry price (₹) | 1,450.00 |
| Stop-loss price (₹) | 1,420.00 |
| Third price (₹) | 1,522.00 |
| Risk amount (₹) | 5,000.00 |
|---|---|
| Per-unit risk (₹) | 30.00 |
| Quantity | 166 |
| Position value (₹) | 2,40,700.00 |
| Actual risk at this quantity (₹) | 4,980.00 |
| Ratio | 1 : 2.4 |
Every figure in the result column is computed by the same code that runs the position size calculator on this site. It uses the five inputs above. The actual risk is below the risk amount because the quantity was rounded down.
What This Number Tells You
The quantity is the largest whole number of units. At that count, the distance between the two prices supplied stays within the amount stated.
The actual risk states what that distance comes to at the rounded count, which is always at or below the amount stated.
The ratio states the relation between two distances measured on the same three prices.
And What It Does Not Tell You
None of these numbers say which prices to use. The three price fields are supplied by the reader and this site puts forward no value for any of them.
The ratio says nothing about how often either price is reached. It is a relation between two distances and contains no frequency at all.
The arithmetic assumes the position closes exactly at the price supplied. Whether it can is a question about markets, and it is outside the division being performed.
Frequently Asked Questions
Why is the quantity rounded down?
Because part units cannot be bought, and rounding up would place the position above the limit that was stated. Rounding down keeps it at or below that limit.
Why show the actual risk separately?
Because rounding down makes it smaller than the amount stated. Showing only the stated amount would show a number that does not apply to the units printed beside it.
What if the two prices are the same?
Then the per-unit risk is zero and the quotient has no answer. In that case this page leaves the fields empty and states the reason instead of printing a number.
Does the ratio include brokerage and taxes?
No. It is a relation between two price distances. Charges are worked out on their own and this site has a brokerage tool for them.
What should the capital figure be?
That is decided before the arithmetic begins and this site puts forward no value for it. Whether it means a whole account or a part of one changes the quantity that comes out.