Stop-loss and position size: how not to lose your account
A stop-loss is the price at which you sell to limit a loss; it is set before you buy. Position size is derived from the stop: the risk per trade (usually 1–2% of the account) divided by the distance from entry to stop. One losing trade then costs a known, small amount.
A common rule is 7–8% below the purchase price, or under the nearest support if closer. Never move a stop down: that turns a limited loss into an unlimited one.
Dollar risk = account × risk per trade. Shares = risk ÷ (entry − stop). With a $10,000 account, 1% risk and a stop $7 below entry you buy 14 shares.
Adding on a decline enlarges a position that has already shown weakness. Add only to a winning position, after a fresh breakout.
At 1% risk even ten losers in a row cost about 10% of the account. At 10% risk the same streak leaves a third of it, which is nearly impossible to win back.
FAQ
How much to put into one stock?
Enough that hitting the stop costs no more than 1–2% of the account.
What if the price opens below my stop?
The stop fills at the first available price and the loss exceeds the plan. That is why positions are often reduced before earnings.
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