free excerpt · vol. 5 · position size

position size: one division, and the stop goes first

margin note: the boxer’s rule: he doesn’t need a better bowl. he needs to stop knocking it over.

the rule

decide in advance how much of the account is lost if a trade goes wrong, keep it small, and keep it the same every time. the point is not the exact number. the point is that it’s small, decided before the trade, and fixed.

notice what the rule is not about: how much money goes into the trade. it’s about how much is lost if the trade is wrong. those are different numbers, and mixing them up is how accounts die.

the division

two inputs:

1. risk amount: the money accepted as a loss on this trade = account × risk %.
2. stop distance: the distance, in %, from the entry to the stop. the stop itself sits at the price where the trade idea is proven wrong.

formula: position size = risk amount ÷ stop distance

a hypothetical example

hypothetical account, made-up numbers. not a recommendation.

• account: $10,000
• risk per trade: 1% → risk amount = $100
• stop distance: 5%

position size = $100 ÷ 0.05 = $2,000. if price falls 5% and the stop fills exactly, the loss is 5% of $2,000 = $100 = 1% of the account.

change only the stop:

• stop at 10% → $100 ÷ 0.10 = $1,000 position.
• stop at 2% → $100 ÷ 0.02 = $5,000 position.

wider stop, smaller position. tighter stop, bigger position. the planned loss stays $100.

one catch: with a very tight stop, the formula can give a position larger than the account. a stop at 0.5% → $100 ÷ 0.005 = $20,000, twice the account. that needs leverage, and leverage brings a liquidation level that has to be checked first.

a common mistake is to do it backwards: pick the size first, then put the stop wherever it “feels” okay.

the fine print

the formula assumes the exit happens exactly at the stop. real markets don’t promise that. fees are charged on the position size, not on the risk amount. a stop-market order can fill worse than the level, and a stop-limit order may not fill at all if price jumps past. gaps can make the loss much bigger than planned. so “1% risk” means “about 1%, usually, unless something weird happens”.

nfa. hypothetical numbers. real losses are not hypothetical. you can lose all the money you put in, and with some leveraged products more. interests: see /disclosure.

what’s inside the full guide (pdf · 20 pages): five chapters (why many traders do worse than they think · position size: one division, one rule · correlation: five bets that are one bet · leverage, explained as a risk, not a method · write your own rulebook), plus a rulebook template, a trade journal with a made-up filled-in example, a one-page checklist, a glossary and sources.

ad · our own product. the full guide, “the lazy guide to risk management” (vol. 5, pdf, 20 pages), is $3.99: rektnotrich.com/courses/risk-management

source: the lazy guide to risk management, vol. 5, v1.1 (oct 2026). chapter 2 · 2.1 “the rule”, 2.2 “the division” and 2.3 “a hypothetical example” (page 6, the catch and “backwards” lines on page 7), 2.5 “the fine print” (page 7, condensed). margin note: 5.4, page 13. contents: page 3.