Chart Analysis · Lesson 8 · Beginner
Position Sizing, Stops and the 2 Percent Rule
You calculate position size from the stop distance in the chart and understand that leverage does not change the position size.
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First the stop, then the size
Survival first: a perfect setup without risk management liquidates the account anyway. First mark the invalidation point on the chart, behind valid support or resistance, not at the liquidation price. Only then do you choose the quantity.
The formula
Maximum quantity equals account times risk percentage divided by entry minus stop. For crypto, Goodman recommends a strict 0.5 to 1 percent per trade, because crypto crashes together.
Set risk, entry and stop and read your position size in USDT.
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Test yourself
Account 10,000 dollars, 1 percent risk, entry 312, stop 295. How many units at most?
- About 5 units
- About 32 units
You double the leverage but keep entry and stop the same. How does your dollar risk change?
- Not at all, the stop distance stays the same
- It doubles with the leverage
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The key points at a glance
- The stop determines the position size, never the other way around (Kovner).
- Quantity equals account times risk percentage divided by entry minus stop.
- Leverage does not change the position size, only the stop distance matters.
Deep dive
Why the 2 percent rule? The math behind it
The 2 percent rule is survival math. Even a system with a 50 percent win rate regularly produces streaks of six to eight losers in a row. Preserving capital keeps you in the game long enough for the edge to work.
- 2 percent risk: an 8-loss streak costs around 15 percent
- 10 percent risk: the same streak halves the account
- After minus 50 percent you need a 100 percent gain to recover
- Goodman advises stricter 0.5 to 1 percent for crypto
The liquidation price is not a stop
The most expensive mistake with leverage: treating the liquidation price as a stop. There you lose not your planned risk but your entire margin plus fees. Your stop belongs at the technical invalidation point behind support or resistance.
- Position size = account times risk percent divided by entry minus stop
- A tight stop allows more units at the same dollar risk
- Leverage does not change position size, it only funds the collateral
- Sizing off the leverage instead of the stop leads to liquidation
Why a 40 percent win rate can be profitable
The best metric is the R-multiple: R is your risk per trade, the distance from entry to stop. A winner over three times that is plus 3R, a stopped-out loser is minus 1R. What matters is not how often you are right, but how big the winners are.
- Good pros, per Murphy, often win only around 40 percent of their trades
- 40 percent at plus 3R versus 60 percent at minus 1R yields plus 0.6R
- Moving a stop after the fact quickly turns minus 1R into minus 5R
- Averaging down enlarges the position once the thesis is disproven
Sources: Elder, Goodman, Schwager, Murphy, Taleb
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