How to Calculate Position Size from Your Loss Budget
Work backward from the loss you can bear and the risk per share to calculate how many shares to buy. Then apply cash limits, concentration limits, and gap-down risk.
Position size can be calculated by dividing your allowable loss by the expected loss per share. This share count assumes you can exit at your specified price; it does not guarantee a ceiling on actual losses. You must be able to reduce the final order size further to account for available cash and limits on concentration in a single stock.
Separate the account's overall budget from the budget for one trade
First, separate living expenses from your investment account and decide how much of the account's loss budget to allocate to one trade. Setting an investment amount first because you like the stock makes it easy to rationalize the potential loss afterward. If the same account has other open trades, add their loss budgets as well. Several trades can react to the same news, so small individual budgets do not necessarily mean low overall account risk.
Apply constraints again after calculating the share count
Risk per share is the difference between the planned purchase price and the reference price used for risk management. You can add an allowance for fees and expected execution slippage. Divide the loss budget by this amount and round down to a tradable unit. If the calculated share count exceeds what available cash can buy or a predetermined position-weight ceiling, use the smaller quantity. Arbitrarily narrowing the reference price gap because the resulting share count is too small defeats the purpose of the calculation.
A stop-loss level is an execution plan, not insurance
A stop order may become a market order when triggered, and the actual execution price can differ. For conditional orders offered by Korean brokerages, also check how each service supports them. Sudden gap-downs, trading halts, and thin order books can produce losses larger than planned, so also calculate a stress case with twice the risk per share. Record differences between planned and actual execution prices in your journal to review your position-sizing assumptions.
For purchases made in stages, recalculate risk using the final total holding. Keeping only the first order small while failing to apply the budget to later purchases increases overall risk. Even if the average purchase price falls, a larger share count can increase the amount lost at the same exit price. Before placing an order, calculate the new average cost, total shares, and risk reference price on one line to reveal size increases hidden by the idea of buying in stages.
Worked example
Hypothetical example: In a KRW 30 million account, you set a trade loss budget of KRW 150,000, plan to buy at KRW 20,000, and use KRW 19,000 as the risk reference price. Using only the KRW 1,000 difference per share gives 150 shares and a purchase amount of KRW 3 million. Adding KRW 200 per share for costs and execution slippage gives KRW 150,000 ÷ KRW 1,200 = 125 shares, costing KRW 2.5 million. If the exit fills at KRW 18,000, the price loss alone on 125 shares is KRW 250,000, exceeding the budget.
What to check
- Have you included costs and an allowance for execution slippage in risk per share?
- Have you rounded the calculated quantity down to an order unit?
- Have you added the loss budgets of open trades?
- Have you separately calculated losses in a gap-down scenario?
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.