Position size comes after the risk decision
Suppose a fictional trader has PHP 100,000 of trading equity and has already decided that one idea may carry PHP 1,000 of planned loss. The next question is not “How much of the account should I buy?” It is “How much can I hold if the thesis fails at the planned invalidation level?”
Assume an entry at PHP 100 per unit and an invalidation at PHP 95. The planned loss per unit is PHP 5.
Loss per unit = Entry price - Invalidation price
PHP 100 - PHP 95 = PHP 5
Position size is then:
Position size = Risk budget ÷ Loss per unit
PHP 1,000 ÷ PHP 5 = 200 units
At a PHP 100 entry, 200 units have a notional value of PHP 20,000. The position is 20% of the PHP 100,000 account, yet the planned price risk to invalidation is 1% of the account. This is why position value and risk amount are not the same thing.
A wider invalidation means a smaller position
Keep the same PHP 1,000 risk budget but move the invalidation to PHP 90. The loss per unit becomes PHP 10.
PHP 1,000 ÷ PHP 10 = 100 units
The position size falls from 200 units to 100 units. The trader did not reduce conviction; the trader simply allowed the trade more room while keeping the account-level risk budget unchanged.
This relationship is one of the most important mechanics in risk management: stop distance and position size must be considered together. Widening a stop without reducing size increases account risk. Tightening a stop merely to create a larger position can make the technical thesis meaningless.
Costs and imperfect exits reduce the theoretical size
The simple formula assumes the loss is exactly the distance from entry to invalidation. Real execution may also include fees, spread, slippage, funding costs or a worse-than-planned fill.
Suppose the trader wants the total planned loss, including an estimated PHP 100 execution buffer, to remain near PHP 1,000. Only PHP 900 remains for price movement.
PHP 900 ÷ PHP 5 = 180 units
The executable size is now 180 units rather than 200. This does not make the trade safe; it simply makes the assumptions more visible.
The calculation can be constrained by the market or account
A mathematically valid position may still be impractical. The asset may have poor depth. The venue may impose minimum order increments. The notional position may exceed the cash available. A leveraged product may add liquidation mechanics that make the simple stop-based calculation incomplete.
If the calculated size cannot be executed without materially changing spread, slippage or leverage risk, the correct response is not to force the formula. Reduce the size, change the plan or do not trade.
No-money practice
Use a fictional PHP 60,000 account with a PHP 600 risk budget. Calculate position size for three setups:
- entry PHP 50, invalidation PHP 48;
- entry PHP 50, invalidation PHP 45;
- entry PHP 50, invalidation PHP 48, but reserve PHP 120 for costs and slippage.
Then explain why the three sizes differ even though the account and initial risk budget are the same.
*Cryptocurrency and virtual asset transactions are highly volatile and irreversible, may result in significant losses, and do not guarantee returns; customers should trade only after understanding the risks involved.
