Position Sizing and Stop Loss Explained
Two separate ideas
A stop loss is the price at which you decide to leave a losing trade. Position size is how much you buy or sell. They work together: the stop decides how far price can move against you, and the size decides what that move costs.
A simple example
Say you decide that one trade may lose at most a small fixed part of your capital. If your stop is far from your entry, your size must be smaller. If it is close, the size can be larger. The loss limit stays the same.
Why it matters
Large losses are hard to recover from. A loss of half your capital needs a gain of double the remaining amount to get back. Small, controlled losses keep you in the game long enough to learn.
Cautions
Prices can jump past a stop, so the real loss can be bigger than planned. A stop is a tool for control, not a guarantee.
Key points
- Stop loss is where you leave a losing trade.
- Position size decides how much that costs.
- Set the loss limit first, then work out the size.
- Gaps can cause losses larger than planned.
Trading involves risk. This article is for education and information only. It is not investment advice, and no course or method promises a return or removes the risk of loss.