# Understanding buying power and position size relative to fixed percentage risk on total capital in any given trade?

I'm trying to wrap my head around understanding buying power, position size and how it's relative to how much I can risk in any single given trade depending on my initial total capital.

For example, say the total amount of capital is \$100,000. The general rule from what I understand is that a trader should only take a maximum of 2% risk of total capital on any single trade to mitigate losses. So, 2% of \$100,000 is \$2,000 which will be my risk for any single trade. My risk-to-reward ratio is 1:2.

Say, the XYZ stock's entry price I entered was filled at \$70.59. My protective stop loss is 69.99 based on my strategy using ATR (average true range) for stop losses. The take profit will be two times the risk at 71.79. The number of shares would be 3,333 to meet the 1:2 risk-to-reward ratio criteria based on the stop loss and take profit price.

Now, when I calculate the position size (seen in screenshot for reference), the value became \$235,297.65 which greatly exceeds my buying power of total amount of capital (\$100,000). This order trade would be invalid due to insufficient buying power in order to execute it.

I'm a bit puzzled and confused as to why that would be the position size value, if I'm only risking 2% of my total capital given a 1:2 risk-to-reward ratio? What am I missing and how can I better calculate it to fit within the confines of my total capital available to purchase shares on a stock?

REFERENCE EXAMPLE:

``````Total capital: \$100,000
Entry Price: \$70.59
Stop Loss Price: \$69.99
Take Profit: \$71.79
# of Shares: 3,333
Risk-to-Reward Ratio: 1:2
Position Size: \$235,297.65 (puzzled at this number)
``````

SCREENSHOT EXAMPLE:

Trading View sample calculation showing the price calculation: Position Size Calculator showing the position size calculation: If this is a cash transaction, you can only buy 1,416 shares with \$100k.

If this is the USA and you're utilizing Reg T 50% margin then you could buy 2,833 shares.

Therefore, I have no clue how you can buy 3,333 shares with \$100k.

As for this concept of only risking 2% of your capital to the downside, that's fine in an orderly market but in a fast market, it's a fairy tale (think gap down in price).

• Okay, thank you for clearing that up for me. I see the number of shares purchased does max out the total capital/buying power specified. Given a fixed stop loss price ... How would I apply how much fixed risk should be taken in a trade if it can't be 2% (\$2,000) of total capital? What would be the more appropriate risk amount in this instance? I just want keep things at a constant so I'm not risking too much or too little. By the way, I'm a swing trader (not day trader), so I do 30 mins with the daily chart time frame. Jan 2 at 1:56
• There's no way to guarantee a limited amount of risk unless you utilize options and that's a more complex and sometimes expensive choice. There are lots of articles on the web about this as well as lots of opinions on how best to do it. The 2% stop loss will be fine as long as there's no gap. Or you can do as Will Rogers suggested: “Buy stocks that go up; if they don’t go up, don’t buy them”. :->) Jan 2 at 14:26
• Right, on the concept of buying into strong uptrend stocks, that’s exactly what I do with my strategy I have. I do limit the amount of risk on every single trade I make. Usually first, right after I enter an ideal trade position, I set an ideal stop loss based on ATR. Then two times for take profit (1:2 risk-to-reward ratio). (1/3) Jan 2 at 15:06
• Once these two price factors are given, it seems I can’t even do 2% risk (\$2,000) because it far exceeds the total capital I have. I would have to reduce the risk percentage further to more like 0.84% which is risking only \$840 which is too low of a risk when maxing out position size at \$98,826. I can tolerate more risk given this scenario. (2/3) Jan 2 at 15:06
• OR I would have to reduce the stop loss price further down to 69.17, which now equals to 2% desired risk. And the take profit would have to be higher at 72.51. Is that the way to approach it or am I doing and thinking about it the wrong way? (3/3) Jan 2 at 15:06