Position sizing answers the most important question in trading before any prediction about direction: how much should you actually put on this trade? Getting this wrong can turn a good strategy into a blown account.
How position size is calculated
First, your risk percentage determines the dollar amount you're willing to lose. Then, the distance between your entry and stop-loss tells you how much you'd lose per unit if the stop is hit. Dividing the dollar risk by the per-unit risk gives you the position size that keeps your loss capped at your intended amount.
Why fixed position sizes are risky
Trading the same number of shares regardless of how close your stop-loss is means your actual dollar risk changes wildly from trade to trade. Position sizing based on risk percentage keeps every trade's potential loss consistent.