Calculating position size
Position size follows from the allowed loss divided by the distance to your stop-loss. It's calculated, not felt.
Most people do it backward: they decide how much money they want to put in, then set a stop-loss somewhere. The correct order is reversed.
First you decide how many euros a failed trade is allowed to cost. Then you decide where your exit sits. The share count follows from both of those, and it follows necessarily.
The math: allowed loss divided by the distance per share. At €50 allowed loss and a €3 gap between entry and stop, that's roughly 16 shares. Not 20, not 100, but 16.
The important side effect: a tight stop allows a larger position, a wide stop forces a smaller one. Your risk stays the same either way. That's exactly the point of the calculation.
The basic formula is share count = (account · risk share) / |entry − stop|. For instruments with a contract size or point value, that acts as an additional divisor. Fees and expected slippage also need to be factored in, since the realized loss regularly exceeds the calculated one.
Stop distance should be derived from market structure, not from the desired risk. A common approach uses a volatility measure like the average true trading range, to place the stop outside normal noise. Set the stop tight instead, just to hit the desired position size, and it's highly likely to get triggered by ordinary fluctuation.
With leveraged instruments, position size decouples from the capital deployed. That creates the most common structural mistake: the math gets applied correctly to the stake, while actual loss exposure hangs on the notional value. What always matters is the notional value of the position moved, not the collateral posted.
Summary
- Set the risk first, then the stop, and the share count follows.
- The stop belongs at a meaningful market level, not wherever the math works out.
- With leveraged products, notional value counts, not the stake.
Did you get it?
What's the basic formula for share count?
The allowed loss in currency divided by the distance between entry and stop per share.
What happens if you set the stop tight just to make the position bigger?
The position is highly likely to get stopped out by normal fluctuation.
What is risk measured against with leveraged products?
The notional value of the position moved, not the collateral posted.
Related
- LiquidationStage 2
- LeverageStage 2
- Setting a stop-loss correctlyStage 1