Size a position by its risk, not by the amount invested
"I put €2,000 into that stock" says nothing useful. The question that matters is: how much do you lose if you are wrong?
Most private investors think in amounts invested. It is intuitive, and it is behind a good share of portfolio accidents: two €2,000 positions can carry risks that differ by a factor of four.
Thinking in R
A position is properly described by a single number: what it costs you if the stop is hit. Call it R, the unit of risk.
Take a worked example, purely for illustration. A €20,000 account, 1% risk accepted per position, so €200. That is your R.
- Stock at €50, stop at €46: you risk €4 per share. Size = 200 / 4 = 50 shares, so €2,500 committed.
- Stock at €50, stop at €42: you risk €8 per share. Size = 200 / 8 = 25 shares, so €1,250 committed.
Same price, same account, same risk, and a position half the size in the second case. The stop drives the size, never the other way round.
The mirror mistake
The opposite error is just as common: picking a tight stop so you can take a large position. The stop then stops being a technical level and becomes an adjustment variable, and it will be hit by the market's ordinary noise.
The right order is always the same:
- Where is my scenario invalidated? That is the stop.
- What is my risk per trade? That is R.
- Size = R ÷ (entry − stop).
The amount committed is a result, not a decision.
What thinking in R makes visible
Once every position is expressed in R, invisible things appear.
Your real exposure. Six open positions at 1 R each are 6 R at stake, not "€12,000 invested". If the whole market breaks down, the stops do not go independently of one another: they go together.
The quality of your exits. A trade closed at +2.4 R and another at −0.9 R compare directly, whatever the amounts. Over fifty trades, the average in R tells you whether your method has a positive expectancy. The average in euros only tells you the size of your account.
The ceiling on a losing streak. Five consecutive losses at 1 R cost 5% of the account. At 3 R, they cost 15%, and you then have to gain more than 17% to get back to level. The asymmetry of losses is why the unit of risk is set small and is not up for negotiation.
In practice
Set R once, in the cold, as a percentage of capital. Between 0.5% and 1% for most private investors. Then let the arithmetic decide the size: it is the one part of the job with nothing left to interpret.
To run the numbers and see what your account becomes after a losing streak: the position size calculator.