Foundations · Lesson 6 · Beginner

Position sizing: the most important formula

You calculate your position size from risk and stop distance, independent of leverage.

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Survival first

The hierarchy is survival, then steady returns, then large profits. Beginners reverse it and blow up their account on the first good setup.

The formula

Quantity equals (account times risk percent) divided by (entry minus stop). Example: 3,000 USDT account, 1 percent equals 30 USDT risk, entry 100, stop 96, that is 4 points, so 7.5 units.

Change entry and stop. The quantity follows from the risk, not from the leverage.

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Test yourself

What does your position size depend on?

on the available leverage
on the risk and the stop distance
on the coin price

The key points at a glance

Quantity = (account times risk percent) divided by (entry minus stop).
Set the stop first, then calculate the quantity. Never the other way around.

Deep dive

Stop first, then size

The most common mix-up: choosing size or leverage first, then hunting for a fitting stop. The right way is the reverse. Kovner: position size is determined by the stop, never the other way around.

First mark the technical invalidation behind support or resistance.
Tie the stop distance to volatility, 1x to 2x ATR.
Never place the stop at the liquidation price.

Worked example with ATR

The formula: number of units equals account times risk percentage, divided by the distance from entry to stop. Goodman's example with 10,000 USDT and 1 percent risk, meaning 100 USDT.

Entry 312, stop 295, distance 17.
At most 5 units, since 17 times 5 is 85 USDT, under the limit.
Stop 295 instead of 297: round levels are targets for stop hunts.

1 percent instead of 2: stricter rules for crypto

Elder's 2 percent rule caps the risk per trade including slippage and fees. Goodman goes stricter for crypto, 0.5 to 1 percent, because correlated altcoins crash together with BTC and are in truth one large position.

Recommendation for this track: 1 percent risk per trade.
6 percent rule: more than 6 percent monthly loss means a trading break.
That is a clean cooling-off against the revenge trade.

Sources: Elder, Schwager, Goodman

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