Risk and position size
Position size is the only thing you control
You do not control whether a trade works. You control exactly one number before it starts: how big it is. Everything people call risk management is this one division problem, done honestly.
The division problem
You know two things before you enter: how much money you are willing to lose if the stop is reached, and how far away the stop is. The position size is the first divided by the second.
risk amount = account x the fraction you chose units = risk amount / (entry - stop) notional = units x entry
Two notes on that first line before anything else. The fraction is yours. This lesson shows you what any fraction does to the other numbers; it does not and will not tell you which one to use, because that depends on facts about your money and your life that nobody reading a web page knows. And it is the fraction of the account you lose if the stop is honoured - the previous lesson is about why the realised loss can be larger.
Work the whole thing once. Account 4,000. Suppose the chosen fraction is 1%, and take the entry and stop from the last lesson.
account = 4,000 chosen fraction = 1% risk amount = 4,000 x 0.01 = 40 entry = 1.2500 stop = 1.2000 distance = 0.0500 (4.00% of entry) units = 40 / 0.0500 = 800 notional = 800 x 1.2500 = 1,000 check: 800 units x 0.0500 lost each = 40
The position is 1,000 of exposure - a quarter of the account - and it puts 40 at stake. Those are two completely different numbers and conflating them is the mistake this lesson exists to remove. How big the position is tells you nothing about how much you are risking until you know where the stop is.
A closer stop does not mean a smaller risk
Keep the account and the fraction identical, and move the stop to 1.2250 - half the distance.
risk amount = 40 (unchanged) entry = 1.2500 stop = 1.2250 distance = 0.0250 (2.00% of entry) units = 40 / 0.0250 = 1,600 notional = 1,600 x 1.2500 = 2,000 half the distance -> double the size -> the same 40 at stake
Half the stop distance bought twice the exposure for the same money at stake. That is the identity worth memorising, because it is the short form of the whole lesson:
notional = risk amount / stop distance as a fraction trade A = 40 / 0.0400 = 1,000 trade B = 40 / 0.0200 = 2,000
The same arithmetic on a coin priced in fractions of a cent
Nothing changes when the price is small, which is worth seeing once because the unit counts get large enough to feel like a different kind of trade.
risk amount = 40 entry = 0.0340 stop = 0.0320 distance = 0.0020 as a percent = 0.0020 / 0.0340 = 5.88% units = 40 / 0.0020 = 20,000 notional = 20,000 x 0.0340 = 680 check: 40 / 0.0588 = 680
Twenty thousand units sounds like a much bigger trade than eight hundred. It is a smaller one: 680 of exposure against 1,000, because the stop is further away in percentage terms. Unit counts are not comparable between coins. Notional and stop percent are.
What the arithmetic will not do for you
- It will not choose the fraction. There is no number this page can give you. It depends on how much of your total money this account is, how long you have been doing this, what else your income depends on, and how you behave after four losses in a row - and the last of those you can only learn about yourself.
- It will not make the loss the number you planned. The stop lesson explains slippage and gaps. The planned loss is the best case of the stop being reached, not a guarantee.
- It does not know about your other positions. Three trades sized to lose a fraction each are one trade sized to lose three times that if all three are long coins that move together, which in crypto is most of them most of the time.
- It cannot survive being overridden. A size computed honestly and then doubled because this one feels different is not a sized position. The computation is only worth doing if its output is binding.
One more practical point. The size you compute will often be an awkward number, and exchanges round to a lot size or a minimum order value. Round down. Rounding up means every position in your record is slightly larger than the one your arithmetic approved, and the difference compounds in the direction you were trying to avoid.
Sizing when the minimum is larger than your answer
Sometimes the division gives a position smaller than the exchange will accept, or smaller than fees make sensible. There are exactly three honest responses and one dishonest one.
- Skip the trade. The cheapest action available and the one nobody takes.
- Find a trade on the same idea with a stop that is further away in percentage terms, which makes the position smaller in notional, not larger.
- Accept that this account cannot trade this instrument at this stop distance yet, and say so plainly to yourself.
- Raise the fraction so the number clears the minimum. This is the dishonest one. The minimum order size of an exchange is not information about how much of your money should be at stake, and letting it set your risk is letting a venue size your trades.
The terms, defined
- Risk amount
- The currency you lose if the stop is honoured. Account times the fraction you chose - and the fraction is always your choice.
- Units
- How much of the asset you hold. Risk amount divided by the per-unit stop distance. Not comparable between coins.
- Notional
- Units times price: the size of the exposure. Comparable between coins, and the number leverage and fees are charged on.
- Stop distance as a fraction
- The stop distance divided by entry. Notional equals the risk amount divided by this, which is the whole lesson in one line.
- Lot size / minimum order
- The granularity and the floor an exchange imposes. Round down to respect them; never raise your risk to clear them.
- Correlated positions
- Several trades that tend to move together. Their risks add, so sizing each one in isolation understates the total.
What this means in practice
- Do the division before you look at the order ticket, not after.
- Write the risk amount in currency, not as a feeling. Forty is a number; "small" is not.
- Keep notional and risk amount separate in your head. A quarter of the account in exposure and one percent of it at stake are both true of the same trade.
- Remember that halving the stop distance doubles the position. Tighter is not automatically safer.
- Compare trades by notional and stop percent, never by unit count.
- Round down to the exchange lot size, and skip the trade rather than raising the fraction to reach a minimum.
Nothing in this lesson is financial advice or an instruction to trade. See the risk disclaimer. We never recommend a leverage setting - that decision is yours.