Stock markets (i.e. individual stocks) have fixed tick sizes (i.e. the smallest possible price movement) and tick values (i.e. the value of the smallest possible price movement), so calculating the size of a trade on a stock market (i.e. the number of shares that can be traded) is very straightforward.
Here's How:
Tick Size and Tick Value - The tick size is the smallest possible price change, and the tick value is the value of the smallest possible price change. For stock markets (i.e. individual stocks) the tick size is 0.01 and the tick value is $0.01 (or Euros, or British pounds, etc.).
Maximum Acceptable Risk - The maximum acceptable risk is the amount of money that you are willing to risk for an individual trade, which obviously can be whatever amount you choose, but according to the 1% risk management calculation the maximum acceptable risk should be 1% of your trading account.
For example, for a trading account with a balance of $50,000, the maximum acceptable risk is calculated as the trading account balance divided by 100 which equals $500:
Maximum Acceptable Risk = $50,000 / 100 = $500
Trade Size - For stock markets, the trade size is the number of shares that are traded (with the minimum being one share). The trade size is calculated using the tick value, the maximum acceptable risk, and the size of the stop loss.
For example, for a trade on the XYZ stock market, with a stop loss of ten ticks, and a maximum acceptable risk of $500, the trade size is calculated as the risk divided by the stop loss in ticks divided by the tick value which equals 5000 shares:
Trade Size = $500 / 10 / $0.01 = 5000
Example - The complete calculation for the trade size (as one formulae) is as follows:
Trading Account Size / 100 / Stop Loss Size (in ticks) / Tick Value = Trade Size
which for a trade on the XYZ stock market, for a trading account with $20,000, and a trade with a stop loss of ten ticks, is as follows:
20,000 / 100 / 10 / 0.01 = 2000
