Position Sizing, SL & TP
Turning a stop distance into a position size, and where targets belong.
Overview
Position sizing is the mechanism that connects your stop loss to your account. Get it right and no single trade can seriously damage you. Get it wrong and one trade can undo months of work.
The Order of Operations
Most traders do this backwards: they decide how much to buy, then place a stop somewhere convenient. The correct sequence is the reverse.
- Decide where the trade is wrong — that is your stop
- Decide what percentage of your account you will risk
- Calculate the position size those two figures imply
Position size is an output, never an input.
The Calculation
Position size = (Account × Risk %) ÷ Distance to stop
Worked example:
- Account: 10,000
- Risk per trade: 1% = 100
- Entry: 50,000
- Stop: 48,000 — a distance of 2,000, or 4%
- Position size: 100 ÷ 0.04 = 2,500
A 2,500 position losing 4% loses 100, which is exactly 1% of the account. If the stop were tighter at 2%, the same 1% risk would allow a 5,000 position.
Choosing Your Risk Percentage
Common practice is 0.5% to 2% per trade. The lower end is more forgiving of losing streaks, which are statistically inevitable.
At 2% risk, ten consecutive losses cost roughly 18% of the account. At 5% risk, the same streak costs about 40%. Losing streaks of that length happen to profitable strategies.
Where the Stop Belongs
A stop marks the price at which your reason for the trade no longer exists — not a figure you find comfortable.
- Below the structure supporting a long, not at a round number
- Beyond the noise of your timeframe
- Outside obvious liquidation and stop clusters where possible
- Placed as an actual order, not held in your head
If the correct stop implies a position smaller than feels worthwhile, the answer is a smaller position, not a closer stop.
Where Targets Belong
Targets should sit just before obvious obstacles, not beyond them.
- Slightly below resistance for a long, so you exit before the crowd
- At the opposite side of an established range
- At a measured move implied by the pattern
Many traders scale out: taking part of the position at a first target and letting the remainder run with a stop moved up. This lowers average profit per trade but makes results far easier to sit through.
Weaknesses & Limitations
- Slippage and gaps mean the realised loss can exceed the calculated one
- Fixed percentage sizing does not adapt to changing volatility
- Correlated positions multiply risk — five long altcoin trades is closer to one large trade
- The maths is simple; following it under pressure is not
Example Use
A trader wants to buy at 100 with structure supporting a stop at 96. On a 5,000 account risking 1%, they can lose 50. A 4% stop distance means a position of 1,250. They enter that size, place the stop as a live order, and do not adjust it.
Risk Management Notes
The most damaging habit in trading is moving a stop further away as price approaches it. Doing so converts a defined, survivable loss into an undefined one. If you cannot leave the stop where you put it, the position was too large from the start.