Lesson 08 · 7 min
Decide the loss before the leverage
A sane size starts from 'what can I lose,' not from the highest number on the slider.
Pick a dollar amount you can actually lose, and a price where you would admit the idea was wrong. The distance between entry and that price decides how big the position may be. Leverage is whatever falls out of the cash you then choose to post. It is the residue, not the goal.
Entry is $100 so the distance is easy to see. This does not place an order.
If the stop fills
$10.00
This is the planned loss.
Position size
$500
+2.0% away from entry.
Leverage if you post only that loss
50.0×
Liquidation then sits on the stop.
To hold this position near 3× you would post about $167. The planned loss is still $10.00 if the stop fills. If the stop slips, more of the posted cash can go.
Posting only the planned loss means about 50×. That is a tight stop relative to the account, not a clever setting. Shrink the idea.
- Dollars at risk ÷ stop distance = position size. Risk $10 with a stop 2% away, and the position is about $500. That is the whole formula.
- If you only post those $10, leverage equals 1 ÷ 2%, which is 50×. Liquidation sits on top of the stop. The first wick closes you, and the stop never gets a clean chance.
- Posting more margin lowers leverage and pushes liquidation past the stop. If that extra cash does not fit the account, the position is too big. Shrink the dollars at risk. Do not 'solve' it by accepting 50×.
In one sentence. The cash on the trade is the cash you can lose. If the math needs hero leverage, skip the trade.
You will risk $10. The stop is 2% away. About how big is the position if the stop fills and you lose that $10?