Position size starts with the loss you can accept.

Budget risk before choosing size

Choose the maximum planned loss for the trade as part of the trading plan. Only use capital whose loss would not impair financial security, and keep margin and forced-liquidation risk separate from the intended stop.

Convert risk into units

A basic size estimate divides the trade risk budget by loss per unit from entry to invalidation, then reduces the result for costs, slippage, gaps and instrument constraints. A hypothetical USD 50,000 account risking 0.5% has a USD 250 budget; with USD 2.50 planned loss per share, the pre-cost ceiling is 100 shares.

Check portfolio concentration

Several individually small trades can express the same market risk. Group correlated positions, shared event exposure and leverage before accepting a new trade.

• Total open risk remains inside the account budget
• Size uses the actual contract or share value
• Stop distance reflects invalidation, not desired size
• A gap or platform failure is included in the contingency plan

Common mistakes

• Reading the result without the stated scope and assumptions.
• Changing the rule after seeing an outcome while still calling the data unseen evidence.

Trader Checklist

• Total open risk remains inside the account budget
• Size uses the actual contract or share value
• Stop distance reflects invalidation, not desired size
• A gap or platform failure is included in the contingency plan

Practice exercise

Choose one of your own trading examples and write one page of rules, evidence and stopping conditions using the principles in "Position size starts with the loss you can accept.".

What evidence would overturn the conclusion

The conclusion should be overturned or narrowed if a key assumption cannot be reproduced inside the supported scope, the control cannot be executed, or new out-of-sample evidence repeatedly contradicts it.