A trading signal gives you the entry, the stop and the targets. It cannot give you the size, because it does not know your account. Position size is the one number that decides how much any loss hurts.
The Formula
Position size = (account size x risk percentage) divided by (entry minus stop).
A Worked Example
| Step | Number |
|---|---|
| Account | $10,000 |
| Risk per trade | 0.5% = $50 |
| Entry (short) | 100.00 |
| Stop | 105.00 |
| Stop distance | 5.00 per unit |
| Position size | $50 / 5.00 = 10 units |
If the stop is hit you lose about $50, which is 0.5% of the account and exactly 1R.
Cap Your Open Positions
Signals can cluster. If five signals fire at once at 0.5% each, you are risking 2.5% on a single move in the market. Decide the maximum number of positions you will hold at once before you start.
- →Choose risk per trade.
- →Choose the maximum number of open positions.
- →Do not increase size after a win or after a loss to 'catch up'.
An example setting
The Secret Vault's Capital Model example uses $10,000, 0.5% risk per trade and up to 10 positions open at once. Those are example settings, not advice.
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Try The Secret Vault FreeDoes a tighter stop mean a bigger position?
Yes, if you hold risk constant. A closer stop allows more units for the same dollar risk, but also a higher chance of being stopped by normal noise.