Position sizing from first principles

Most new traders pick a position size by feel: “I’ll buy $2,000 of this.” The problem is that $2,000 of a coin with a tight stop and $2,000 of a coin with a wide stop are completely different bets. One might cost you $40 if you are wrong. The other might cost you $400.

Position sizing fixes this by working backwards from the one number you can actually control: how much you are willing to lose if this trade is wrong.

The three inputs

1. Account equity. The current value of the account you are trading, not the amount you started with.
2. Risk per trade. The share of equity you accept losing if the stop is hit. Many traders use somewhere between 0.25% and 2%. Lower numbers survive longer losing streaks.
3. Stop distance. The distance between your entry price and the price where your idea is proven wrong. The stop comes from the chart and the thesis, not from how much you want to make.

The formula

Position size (units) = (Equity × Risk %) ÷ |Entry − Stop|

The top half is your dollar risk. The bottom half is how much you lose per unit if the stop is hit. Dividing one by the other tells you how many units you can hold so that a stop-out costs roughly your planned dollar risk. It is a plan, not a guarantee: fees, slippage, and price gaps past the stop can make the real loss larger.

A worked example (hypothetical numbers)

• Equity: $10,000
• Risk per trade: 1%, so dollar risk = $100
• Entry: BTC at $60,000
• Stop: $58,800, so risk per unit = $1,200

Position size = $100 ÷ $1,200 = 0.0833 BTC, a notional position of about $5,000.

Notice the result. You are “using” half the account, but you are only risking 1% of it. That is the difference between exposure and risk, and confusing the two is one of the most common beginner errors.

Now move the stop closer, to $59,400. Risk per unit is $600, so size becomes 0.1667 BTC (about $10,000 notional). Same $100 risk, twice the position. A tighter stop lets you hold more, but it also gets hit more often by normal noise. There is no free lunch, only trade-offs you choose on purpose.

What leverage does and does not do

(Terms: leverage, liquidation.)

Leverage lets you open a position larger than the cash you post as margin. It does not change the math above. If your stop is $1,200 below entry and you hold 0.0833 BTC, you lose about $100 at the stop whether you used 1× or 10×.

What leverage does change is how close your liquidation price is. With high leverage, the exchange may close you out before your planned stop is reached. A safe habit: size from the stop first, then check that the liquidation price sits well beyond the stop.

Costs make the real loss bigger

The formula assumes you exit exactly at your stop with zero fees. In practice:

• Fees apply on entry and exit.
• Slippage (getting filled at a worse price than you asked for) is common on stop orders, especially in fast or thin markets.

A simple adjustment is to add your expected round-trip costs to the stop distance before dividing. That shrinks the size slightly so that a stop-out stays close to your planned dollar risk.

Why this matters more than entries

Two traders can take the exact same trades and end up in very different places, purely because of sizing. Consistent risk per trade means:

• One stop-out is designed to cost a small, known share of the account. That limit only holds if the stop is actually placed and honored, and gaps, fast markets, or leverage can push a loss past it. Stops do not guarantee the exit price.
• Your results can be measured in R (multiples of risk), which makes trades comparable. See the next module.
• You can estimate in advance what a losing streak would cost (see the losing-streak illustration), instead of finding out the hard way.

Try the position size calculator with your own numbers.

Sources

• U.S. SEC, Investor.gov, “Stop Order”: once triggered, a stop order becomes a market order, and the fill “may differ from the stop price, especially in a fast-moving market.” Accessed November 6, 2026.
• U.S. CFTC, “Customer Advisory: Understand the Risks of Virtual Currency Trading”: warns of volatile price swings and flash crashes, notes that leveraged traders “may lose more than their initial investments,” and that “there is no such thing as a guaranteed investment or trading strategy.” Accessed November 6, 2026.

Education only, not financial advice.