For Business

Trading Math

How to Calculate Position Size

Most traders pick a lot size out of habit and place the stop wherever the chart looks tidy, so every trade risks a different, unknown amount. This paper replaces both with three lines of arithmetic worked on a real trade — and shows why a wider stop must mean a smaller position, in one picture.

Difficulty
Beginner
Reading time
8 min
Pages
9

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The skill

Most people choose the amount to buy first and place the stop afterwards, wherever the chart looks tidy. Done that way, every trade risks a different amount and none of them are known. This paper turns it round.

Step one — measure the stop

Put the stop where the idea is wrong. On this trade, price refused 1.15547 three times and then closed above it — so we buy that close, and we are wrong if price comes back below the line.

Now measure the gap between the two prices.

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