The Position Size Before the Entry

The entry receives attention because it feels intelligent. Position size decides whether you remain able to think.

Begin with invalidation.

At what observable price or condition is the original trade idea wrong? The distance between entry and invalidation is the risk per unit.

Then choose the maximum amount the account is allowed to lose if the planned exit executes:

Position size = maximum risk in CHF ÷ risk per unit.

If the account is CHF 20,000 and the written risk limit is 0.5%, maximum planned loss is CHF 100. If entry is CHF 50 and invalidation is CHF 48, risk per share is CHF 2 before costs and slippage, so the preliminary size is 50 shares. Real execution risk may require a smaller position.

Do not move the invalidation closer merely to buy more. The market structure determines invalidation; the risk budget determines size.

Now add gap risk. A stop order is an instruction, not an insurance policy. In a fast or closed market, execution can occur beyond the planned level. For earnings, illiquid instruments, leveraged products and overnight positions, use a severe exit price rather than the ideal stop price.

Then add portfolio heat:

Portfolio heat = total open planned loss if all current invalidations are reached.

Three trades in correlated technology companies are not three independent risks. A long equity position, a crypto position and a cyclical currency trade may all depend on the same appetite for risk. Group positions by shared driver, not by symbol.

Set four limits:

Risk per trade.
Total portfolio heat.
Maximum loss per day or week.
Maximum drawdown before size is reduced or trading stops for review.

Limits should become tighter when evidence is weak, not wider when confidence is high.

The loss limit is not designed to prevent losing days. It prevents a losing day from changing the quality of the next decision. After a limit is reached, the work becomes review, not recovery.

Never average down unless the additional entry, total maximum loss and invalidation were part of the written plan before the first fill. “It is cheaper” is not a new thesis.

Position size also disciplines concentration in investing and business. The principle is broader: every uncertain idea receives capital according to the damage of being wrong, not the pleasure of being right.

The Field Note

Create a position-size card with account equity, risk percentage, entry, invalidation, severe exit, costs, size and total portfolio heat. No order may be entered until the card is complete.

CHOOSE THE NEXT MOVE

01If you regularly change the stop or risk after entry, stop live trading and move to W15 simulation.

02If execution follows the card, continue to W15 and evaluate the full sample.

Sources & Swiss context

FTA Circular 36 on leverage and derivatives: https://www.estv.admin.ch/dam/estv/fr/dokumente/dbst/kreisschreiben/dbst-ks-2012-1-036-d-fr.pdf.download.pdf/dbst-ks-2012-1-036-d-fr.pdf

Editorial education, not personalised investment, legal or tax advice. Swiss rules, limits and product terms can change; verify current information before acting.