Alright, so everyone talks about risking 1-2% of your capital per trade. That's fine as a starting point, but it's often oversimplified. It's not just about what percentage of your account you're willing to lose if the trade goes south; it's about how much dollar value that translates into, and then backing into the number of units you can afford to trade given your stop loss.
Let's say you have a $10,000 account and decide you'll risk 1% per trade. That means your maximum loss on any single trade is $100. Now, how do you determine your position size for something like $CORN, currently trading around 18.26? If you set your stop loss at 18.00, your potential loss per unit is $0.26. To figure out how many units you can buy, you take your maximum risk ($100) and divide it by your per-unit risk ($0.26). So, $100 / $0.26 = approximately 384 units of $CORN. This ensures that even if $CORN hits your stop at 18.00, you've only lost your predetermined $100.
It’s a crucial distinction because simply buying a fixed number of units, regardless of where your stop is placed, can lead to wildly inconsistent risk profiles. A tighter stop means you can take a larger position size for the same dollar risk, and vice versa. It’s a core component of managing drawdowns and staying in the game.