Risk, Stop Loss and Position Size: Author of
Risk, Stop Loss and Position Size: Author of
Daryl Guppy
www.guppytraders.com
Author of
Share Trading, Market Trading Tactics,Chart
Trading, Better Stock Trading, Snapshot
Trading, Trend Trading
Risk Myths
• Traders think they understand risk
1
Understanding how much is at risk
2
Using chart based stops
Set the chart based support
and use as a stop loss level
How far can price fall?
Is risk the same?
Is the stop too tight?
The position of the
support level does not Stop
loss
change. The closer the here
entry point to support,
the smaller the
financial injury
2% Rule
3
2% math and position size
Calculate theoretical maximum Calculate practical position size.
position size This is always equal to or less
Always start with portfolio then the maximum size.
and trade risk Adjust number until dollar size
Enter preferred entry price is acceptable to you
Enter stop loss price - support Some figures do not change
Maximum position size
Cost and risk are calculated
calculated
AVJ AVJ
50,000 13,000
$2,000 $2,000
4
Reducing position size and risk
Proposed entry 85 Stop loss 80
Total trading capital $100,000 so risk is $2,000
Risk on this trade is $2,000
Find the solution that suits your preferred trading size (eg$20,000)
equal to or less than the maximum permissible size – (eg$34,000)
Preferred
size
85
$2,000
80
14%
profit
19%
loss
Limit losses to grow
profits
5
Risk and reward ratios
• Risk is known
with a stop loss
• Reward is
uncertain
• Better trades have
a risk/reward ratio
Aggressive buy
greater than 3
• Setting a reward
target is easy with
a pattern trade
Objective is to find three figures Entry, Risk and Reward
Entry 17
Stop loss 15
6
Selecting better trades
The
risk/reward Trade Trade Trade
1 2 3
ratio is used to
17 16 17
choose
20 20 24
between 15 15 15
competing
3 4 7
trading 2 1 2
opportunities