Protect the downside
Size risk first, place invalidation logically and survive losing streaks.
01
Invalidation comes first
A stop should sit where the trade thesis is no longer valid—not where the loss happens to feel comfortable. Find that level first. If the required stop creates too much monetary risk, reduce the position size or skip the setup.
02
Risk a fixed amount
Choose a planned price-loss budget before entering. For a simple spot position, units = planned price loss ÷ the cash price difference between entry and assumed stop execution. Notional position value = units × entry price. Equivalently, notional value = planned price loss ÷ the stop distance expressed as a decimal percentage of entry. These are different units, not interchangeable formulas. Fees and slippage are extra; a stop does not guarantee an execution price or a maximum loss. A stop-limit order can remain unfilled. Derivatives need contract-specific margin and liquidation calculations.
03
One trade proves nothing
A good process can produce a loss and a poor process can produce a win. Judge a method across a meaningful sample, record execution errors and avoid increasing risk simply because the last few trades succeeded.
Practice exercise
Using a hypothetical £10,000 account and a chosen 0.5% planned price-loss budget, calculate that budget. Then calculate notional position value if the assumed stop execution is 4% below entry. This risk percentage is an example, not a recommendation.
Knowledge check
Is £50 a guaranteed maximum loss on a £10,000 account with a 0.5% planned risk budget?
No. £50 is the simplified planned price loss. With a 4% stop distance, notional position value is £50 ÷ 0.04 = £1,250. Fees, slippage, gaps or execution failures can make the actual loss larger.
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Educational information, not personalised financial advice. Examples do not establish future performance. Trading can result in substantial losses.