Decide how much before you decide what.
- Risk 1–2% of the account per idea, not per feeling
- Size and stop are one decision, made together
- A position that can halve your account is not an idea
What this is about
Most people decide what to buy and treat how much as an afterthought. It is the wrong way round. Which share you pick determines whether a position wins; how much you bought determines whether it matters.
The arithmetic nobody enjoys
Losses and gains are not symmetric, because a percentage loss is taken from a larger number than the gain that has to undo it.
| You lose | You need, to get back to even |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 33.3% | 50% |
| 50% | 100% |
| 75% | 300% |
This is not a rule of thumb — it is division. Lose half and doubling only returns you to where you started.
The practical consequence: a position large enough to halve your account is a position that can end your ability to recover from it. Not a bad trade — a terminal one.
A method, not a formula
One common convention is to fix the loss first and let it decide the size:
- Decide what you are willing to lose on this position — a percentage of the whole account, not of the position. Many use 1–2%.
- Decide where you would admit you were wrong — a price at which the reason you bought no longer holds.
- The gap between those two numbers gives you the size. Risk 200 units of your account currency, exit 20% below entry, and the position is 1,000.
The order matters. Sizing first and inventing an exit afterwards is how a small loss becomes a large one.
The volatility problem
A fixed percentage treats every share as equally jumpy, and they are not. A steady utility and a small exploratory company are not comparable positions at the same size, even when the amounts of money match.
Average True Range measures the average size of a share's daily trading range, overnight gaps included — not its net movement. It is quoted in currency, not percent, so a raw ATR cannot be compared across shares: divide it by the price first, or a share at 2 and a share at 200 will look like they carry the same risk. Sizing against it — a smaller position in a jumpier share — is how two positions come to represent similar risk rather than the same amount of money.
A worked example
Your account is 10,000 and you have decided a single idea may cost you 1% — that is 100, decided before anything is bought. You would admit the idea was wrong 20% below your entry. The size follows: 100 ÷ 0.20 = a 500 position. A jumpier share, where the honest admit-it price sits 40% down, gets 100 ÷ 0.40 = 250. Same account, same risk, half the position — the size absorbed the difference in the share, which is the whole method.
Now the afterthought version. You put 5,000 — half the account — into the first share because you liked it, and the same 20% drop arrives. It costs 1,000: ten percent of the account, ten times what you had decided the idea was worth, from exactly the same price move. Do that twice and the recovery table above says you now need +25% just to stand still. The share did nothing unusual in either version. The size did everything.
What this does not tell you
These numbers are convention, not science. 1–2% is widely used because it survives a long run of losses, not because anything proves it optimal. Your right number depends on how much loss you can watch without abandoning the plan — which is a fact about you, not about markets.
The exit is a plan, not a guarantee. Prices gap. A share can open well below the level you meant to leave at, or stop trading while news is digested. The figure you set is the loss you are planning for, not a floor — the real loss can be larger, and in thinly traded shares often is.
Sizing does not make a bad position good. It bounds the damage. A carefully sized position in something you do not understand is still something you do not understand.
And it says nothing about concentration. Ten positions sized identically in ten companies from one industry move together far more than ten unrelated ones — much closer to one position than to ten, though not literally one.
Where to see this in the app
The Add asset and order dialogs show the live price, so the arithmetic can be done before committing. Your Portfolio page shows what each holding is as a share of the whole — the number this lesson is actually about.