If stock entry price is say $20, we would put our protective stop at $20-15% = $17, so we will risk $3 per share. Let us see how it works, say we have equity of $60,000, and we only want to risk 1% in single trade ($600). SetPositionSize ( PctSize, spsPercentOfEquity ) PctSize = 100 * PositionRisk / TradeRisk ĪpplyStop ( stopTypeLoss, stopModePercent, TradeRisk, True ) TradeRisk = 15 // trade risk in percent equals to max. loss percentage stop PositionRisk = 1 // how much (in percent of equity) we risk in single position Buy = Cross ( C, MA ( C, 20 ) ) // some trading rules As we can see desired position size is inversely proportional to stop amount. If our stop is placed 15% away, it means that to risk just 1% of entire equity we can put 1/15 part of our available equity into this trade. Now, imagine that we only allow to lose 1% of entire portfolio equity in single trade. So risk practically means the amount of maximum loss stop. If your stop is 15% away from entry price, in worst case you risk losing 15% of the position size (amount invested), not the entire amount. The amount risked should not be confused with amount invested. Typically you limit your loses by setting up a maximum loss stop. Van Tharp defines risk as the maximum amount that can be lost in a trade. One of most popular position sizing techniques is Van Tharp risk-based method.
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