Calculate position size from stop distance

4.7.2 · Stock-Market › Risk & Money Management

HOW to derive it (from first principles)

Step 1 — Loss per share. Agar tumhare paas 1 share hai aur stop hit ho gaya, toh tum stop distance lose karte ho: $loss per share = ∣ E - S ∣ = d$

Yeh step kyun? Kyunki tumhara loss literally woh price hai jo tumne pay ki minus woh price jo tumne sell ki.

Step 2 — $N$ shares ke liye loss. $total loss = N \times d$

Yeh step kyun? Har share $d$ lose karta hai, toh $N$ shares $N$ guna zyaada lose karte hain. Linear scaling hai.

Step 3 — Total loss ko apne chosen risk $R$ ke barabar set karo. Hum chahte hain ki loss (agar stopped hua) exactly $R$ ke barabar ho: $N \times d = R$

Yeh step kyun? Yahi toh poora point hai — hum outcome ko force kar rahe hain, iske liye pray nahi kar rahe.

Step 4 — $N$ ke liye solve karo.

Aur kyunki risk aam taur par account ka % hota hai:

Capital check (kabhi skip mat karo): shares tumhare buying power mein actually fit bhi hone chahiye: $cost = N \times E \leq available capital$ Agar cost capital se zyaada ho, toh tum capital se bound ho, risk se nahi (bahut tight stop zyaada shares demand kar sakta hai jo tum afford nahi kar sakte).

Figure — Calculate position size from stop distance

Worked Examples

Common Mistakes (Steel-manned)

Flashcards

What is the position-size formula from stop distance?

N = R /∣ E - S ∣

, where

R

= dollar risk,

E

= entry,

S

= stop.

Why divide by stop distance and not entry price?

Tumhara loss jab stop hit hota hai woh price ka move tumhare against hai (

d = ∣ E - S ∣

), entry level nahi.

How do you get

R

from account equity?

R = equity \times risk%

(e.g. $10k × 1% = $100).

If you tighten your stop but keep risk fixed, does share count go up or down?

Upar jaata hai — chhota

d

matlab same total risk ke liye zyaada shares.

Which way do you round the share count, and why?

Neeche, taaki realized risk

\leq

planned risk rahe.

What extra check must you always run after computing

N

Capital check:

N \times E \leq

available capital.

Account $50k, 2% risk, entry $40, stop $36 → shares?

R=\

1000

,

d=$4

,

N=250

shares. What does fixed \

exposure get wrong vs fixed $ risk? ::: Same exposure alag risk deta hai jab stop distances alag hon; sirf

R

fix karne se risk constant rehta hai.

Recall Feynman: explain to a 12-year-old

Socho tum ek betting game khel rahe ho aur tumne khud se promise kiya: "Main ek round mein kabhi 2 chips se zyaada nahi harunga." Ab, game tumhare against kitni door ja sakti hai yeh depend karta hai ki "main quit karta hoon" line kahaan hai. Agar quit line close hai, ek chip thoda hi lose karta hai, toh tum kaafi saare chips rakh sakte ho. Agar quit line door hai, har chip bahut zyaada lose kar sakta hai, toh tum kam chips rakhte ho. Tum bas apni 2 chips ko divide karo har chip ke potential loss se, aur woh tumhe batata hai kitne chips khelne hain. Exactly yahi traders paisa aur shares ke saath karte hain.

Connections

Risk per trade (1% / 2% rule) — jahaan se $R$ aata hai.
Stop-loss placement — $d$ determine karta hai, yaani divisor.
Risk-Reward Ratio — sizing ke saath pair hota hai ye judge karne ke liye ki koi trade lene layak hai ya nahi.
Position sizing with volatility (ATR) — fixed stop ki jagah $d = k \times ATR$ use karna.
Account drawdown & risk of ruin — kyun fixed-fractional sizing tumhe alive rakhti hai.
Leverage and buying power — $N$ par capital cap.

WHY this matters (the 80/20)

WHAT are the pieces?