Three independent caps are calculated and the smallest one wins:
- Risk cap — (equity × risk%) ÷ (entry − stop)
- Concentration cap — (equity × max position%) ÷ entry
- Liquidity cap — 5% of average daily volume, if you supply it
Share counts are always rounded down. Rounding up would breach whichever cap is binding.
Why three caps instead of one
The textbook formula uses only the first. It assumes your stop will execute at your stop price, which in liquid large-caps is roughly true and in small-caps often isn't.
The concentration cap exists because stops don't protect against gaps and halts. If a stock is halted for news and reopens 40% lower, your stop never executed — your loss is set by position size alone. Capping the position at a fixed share of the account bounds that scenario.
The liquidity cap exists because a position you can't exit isn't a position, it's a commitment. If your risk-derived size is a large fraction of what the stock trades in a day, you'll move the price against yourself getting out, and in a panic you may not get out at all. Five percent of average daily volume is a common working ceiling; for genuinely illiquid names, lower it.
It cannot tell you whether the trade is a good idea, whether the stop is in a sensible place, or whether your strategy has positive expectancy. It does arithmetic. The judgements are yours, and this is not investment advice.
Reading the output
| Output | What it means |
|---|---|
| Shares to buy | The largest share count that satisfies all three caps |
| Binding constraint | Which cap decided the number. If it's liquidity or concentration, your intended risk wasn't reachable |
| Position cost | Shares × entry, before commissions and spread |
| Risk if stopped | Shares × stop distance — your loss if the stop fills at the stop price |
When the binding constraint is anything other than "risk," you are taking less risk than you budgeted — which is fine. When the risk cap binds but the position cost is a large share of your account, look hard at the gap scenario before proceeding.
The full reasoning behind these numbers — choosing a risk percentage, where the stop belongs, the drawdown arithmetic, and the PDT and settlement rules that constrain small accounts — is in position sizing and risk management for small accounts.
This calculator is a general educational tool. It is not investment advice, not a recommendation regarding any security or strategy, and not a guarantee of any outcome. Position sizing limits the size of losses; it does not prevent them, and actual losses can exceed the calculated figure because of gaps, halts and slippage. See our full disclosures.