Position sizing from first principles
Translate an invalidation point and loss budget into exposure.
Position sizing connects a market idea to account survival. The logical order is: define where the idea is wrong, decide the acceptable loss, then calculate size. Desired profit is not a risk input.
Cash risk
Choose a loss budget that the account and decision process can tolerate. Percentage rules are not universal; concentration, gaps, liquidity, personal finances and total portfolio exposure matter.
Distance and unit risk
The difference between entry and invalidation estimates risk per unit. For derivatives, contract multipliers, tick value and currency conversion must be included.
Real loss can exceed planned loss
A calculation is a model. Gaps, slippage, fees and failed liquidity can produce a larger loss. Leveraged products may create obligations beyond the initial deposit depending on product and protection.
The lesson in three lines.
- 1Define invalidation before size.
- 2Include multipliers and currency effects.
- 3Planned loss is an estimate, not a guarantee.