Risk Management · Lesson 5 · Beginner
Position Sizing From the Stop
You derive the number of units from account, risk percent and stop distance, leverage plays no role.
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Stop First, Then Size
Kovner: position size is determined by the stop, that is the only way to sleep calmly. Order is non-negotiable: stop on the chart first, then units.
The formula: maximum units equals (account times risk percent) divided by (entry minus stop). Leverage does not appear here.
Entry, stop and risk in, position size (USDT) out.
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Goodman Example
Account 10,000, 1 percent equals 100 USD risk. Entry 312, stop 295, distance 17. 100 divided by 17 gives about 5 units.
If the sensible stop is far away, you trade fewer units. You never squeeze the stop tighter just to buy more units.
Test yourself
Account 3,000 USDT, 1 percent risk, entry 100, stop 96. How large is the position?
- 7.5 units
- 30 units
- depends on the leverage
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The key points at a glance
- Set the stop on the chart first, then derive the number of units, never the other way around.
- Units = (account times risk percent) divided by (entry minus stop).
- A wider stop means fewer units, never tighten the stop instead.
Deep dive
Why the stop comes first and the number of units second
Most people do it backwards: first decide how many coins, then look for a stop that fits. Kovner: position size is determined by the stop, not the other way around. First the stop on the chart, then the number of units as a pure calculation.
A trade without these numbers, written down before you enter, is not a trade, it is gambling.
- Iron Triangle: max dollar risk, entry and stop.
- Risk per unit is the distance entry minus stop.
- Units = (account times risk percent) divided by (entry minus stop).
- Hite: reward cannot be quantified, risk can.
Two fully worked examples
Leverage does not appear anywhere in either calculation, it is irrelevant to the question 'how many units'. In practice always round down, to keep a buffer for fees and slippage.
- Account 10,000 USD, 1 percent = 100 USD. Entry 312, stop 295, distance 17: about 5 units.
- Account 3,000 USDT, 1 percent = 30 USDT. Entry 100, stop 96, distance 4: 7.5 units, better rounded down to 7.
- The 30 is the risk amount, not the number of units.
A wider stop means fewer units, never a tighter stop
If the only sensible stop is far away and the math spits out a small position, you trade fewer units. You never squeeze the stop tighter just to buy more units. A tight stop in the wrong place only gets cleared out by noise more often.
Kovner's colleague doubled his money twice in one year and ended at zero, because one oversized trade gave it all back.
Sources: Elder, Schwager, Goodman, Murphy
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