Strategies · Lesson 10 · Beginner
Position Sizing from the Stop
You calculate your position size from account risk and stop distance and understand that only the stop distance matters, not the leverage.
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Size Follows from the Stop
The strategy angle: set the stop technically at the setup first, then derive the size, never the other way around. Kovner: the position size is determined by the stop.
The formula, calculator, and full derivation are in the risk management lesson Position Sizing from the Stop (der-stop-und-ein-prozent-regel). For the setup only one thing matters: the stop distance determines the size, not the leverage.
Derive size from account risk and stop distance
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Test yourself
Account 10,000 USD, 1 percent risk, entry 312, stop 295. How large is the position?
- Around 5 units
- 100 units
- It depends on the leverage
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The key points at a glance
- Recommendation for leveraged beginners: 1 percent risk per trade.
- Size = (account times risk percent) divided by (entry minus stop).
- The risk refers to the stop distance, not to the margin used.
- Leverage does not change the position size.
Deep dive
How many percent to risk per trade?
Elder names a maximum of 2 percent of account equity, including slippage and fees. Hite and Kovner go tighter at 1 percent. Hite: 'By only risking 1 percent, I am indifferent to any individual trade.'
- Leveraged beginners: 1 percent, Goodman names 0.5 to 1 percent
- 6 percent rule: after three losses in a row, take a monthly break
- 5 to 10 percent per trade wipes you out after a few missteps
Why leverage does not change your position size
Leverage does not appear in the position sizing formula. Kovner: 'The position size on a trade is determined by the stop.' You measure the distance from entry to stop and divide your risk amount by that distance.
- Example: account 10000 dollars, 1 percent risk is 100 dollars
- Entry around 312, stop 295, distance 17 dollars
- 100 divided by 17 gives about 5 units
- Leverage only supplies the required margin, not the quantity
Correlated positions are really one big position
Kovner: 'If you have eight highly correlated positions, then you are really trading one position that is eight times as large.' Long BTC and long ETH is not a double, it is one bet, because cryptos crash together in stress phases.
Calculate your total risk across all correlated positions, not per ticker. With two bullish setups you take only the stronger one. Round the quantity down and leave a buffer for slippage.
Sources: Elder, Goodman, Schwager
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