Position sizing and leverage: risk, stops and fees

Size a position from invalidation, distinguish leverage from exposure and test whether a setup survives real trading costs.

Course outline

1. 1

   Calculate position size from your invalidation level

   Work backwards from a risk budget and stop loss to a position size. Include fees and slippage, round down and avoid counting leverage twice.

   7 min

   In short: Position size = (risk budget − fixed costs) ÷ (stop distance + fees + slippage + funding per unit). Round down to the size step. Leverage changes the margin required, not the loss of this quantity.

2. 2

   Separate leverage, margin and liquidation risk

   Leverage and margin are different risks. Calculate initial margin for one position at two leverage settings; a maintenance buffer is not a liquidation price.

   7 min

   In short: For a fixed quantity, leverage only changes the initial margin (notional ÷ leverage), not the profit or loss per price move. Higher leverage leaves a smaller collateral cushion before liquidation; exposure grows only if you use it to trade a larger quantity.

3. 3

   Calculate trading expectancy after fees and slippage

   Turn win rate and average wins and losses into net expectancy. Find the break-even win rate and see how fees and slippage can turn a 2R setup negative.

   7 min

   In short: Net expectancy = win rate × average win − loss rate × average loss − average cost per trade. Break-even win rate = (L + C) ÷ (W + L). A 40% win rate with 2R winners loses money once costs reach 0.25R per trade.

4. 4

   Choose between stop-market and stop-limit orders

   A stop's trigger is not its fill. Compare gaps, partial fills, reduce-only and exchange protection rules before relying on a stop-market or stop-limit exit.

   7 min

   In short: A stop-market order sends a market order at the trigger and prioritises the exit over the price. A stop-limit order sends a limit order and may stay unfilled if price gaps past the limit. Neither removes gap risk.

5. 5

   Build a trading journal that can reject a setup

   Build a trading journal that can disprove your favourite setup. Freeze entry rules, keep rejected trades, measure net outcomes and test on later data.

   8 min

   In short: Log every qualifying opportunity under fixed rules, including rejected, missed and unfilled ones, with the costs of each trade. Develop the rules on an earlier period and judge them only on a later, untouched period.

Open full-size diagram

1. Calculate position size from your invalidation level
2. Separate leverage, margin and liquidation risk
3. Calculate trading expectancy after fees and slippage
4. Choose between stop-market and stop-limit orders
5. Build a trading journal that can reject a setup

Educational material. Examples do not establish a profitable strategy. Trading costs, gaps and liquidation can produce losses beyond a planned stop.