The formula
Position size equals the amount you are risking divided by the distance from entry to stop. Everything else follows from that one relationship.
Account $20,000, risking 1% = $200. Entry $80, stop $76 → risk per unit $4 → position size 50 units, a $4,000 position. The position value varies trade to trade; the $200 at risk never does.
Why the risk percentage is small
- At 1% per trade, ten consecutive losses cost about 9.6% — recoverable.
- At 5% per trade, the same streak costs about 40% — requiring a 67% gain to get back.
- At 10% per trade, it costs 65% — requiring 186% to recover.
- Losing streaks are not hypothetical. A strategy that wins 55% of the time will still produce a run of eight losses over a few hundred trades.
Sizing is what makes the stop honest
Traders who size first and place the stop afterwards end up putting the stop wherever the money runs out — usually inside normal noise. Sizing from the stop reverses that: the stop goes where the chart says the idea is wrong, and the size adjusts to keep the money at risk constant.
A wider stop is not more expensive under this method. It simply means a smaller position.
Correlation is hidden position size
Three long crypto positions at 1% each are not three 1% risks. In a market-wide sell-off they move together, and the real exposure is closer to a single 3% position. Group correlated trades and size the group, not each leg.