How do you turn a stop distance into a share count?
This is the single most useful calculation in the course, and it takes about eight seconds once you know it. It converts an abstract "I'll risk 1%" into a concrete number of shares.
The formula
Shares = (Equity × risk fraction) ÷ (Entry price − Stop price)
The numerator is your risk budget in dollars. The denominator is the risk per share. Divide one by the other and you get the only share count consistent with both.
Worked example
A hypothetical $50,000 account, risking 1% = $500 on the trade. Entry is $80.00. Everything else depends on where the stop goes:
| Stop | Risk per share | Shares (round down) | Exposure | Exposure as % of account |
|---|---|---|---|---|
| $76.00 | $4.00 | 125 | $10,000 | 20% |
| $78.00 | $2.00 | 250 | $20,000 | 40% |
| $79.50 | $0.50 | 1,000 | $80,000 | 160% |
Read that table twice. The risk is $500 in every row. The exposure varies by a factor of eight. A tighter stop does not make a trade safer — it buys a bigger position at the same nominal risk, and hands you a position that is far more sensitive to everything that can go wrong with the exit.
The bottom row is the trap. Half a dollar of slippage doubles the loss. The position needs margin. And a $0.50 stop on a stock that routinely moves $1.50 a day will be hit by noise regardless of whether the idea was any good.
Three practical corrections
- Round down, always. 500 ÷ 4.00 = 125 exactly, but 500 ÷ 1.30 = 384.6 → take 384 shares, not 385.
- Put costs on the risk leg. Commission and the bid-ask spread come out of the same budget. If a round trip costs $10, the trade's real risk budget is $490 of price movement.
- Add a second constraint. Most practitioners cap exposure as well as risk — for example, no single position above some percentage of equity. On tight stops that cap binds before the risk formula does, and it's the cap that saves you from the 160% row.
The ordering that matters
Notice what the formula requires as an input: the stop. You cannot compute a size until you've decided where the trade is wrong. That means the chart comes first, the stop second, the size third. Doing it in the other order — "I want 500 shares, so where can I put a stop?" — produces exits placed by your wallet rather than by the market, which is Unit 2's opening subject.
Try it now
- Take the latest close on the month above as a hypothetical entry, and choose a stop 6% below it.
- Compute the share count for a hypothetical $30,000 account at 1% risk, then at 2%. Round down.
- Compute the exposure for each and express it as a percentage of the account. If either exceeds 100%, you've just discovered why the second constraint exists.