Stop Losses, Position Sizing and Your Trading Edge

A stop loss is a decision made before the trade about where you will admit you were wrong. Position sizing is the decision about how much that will cost. Most traders make the first and skip the second, and that is why a sound method can still empty an account.

How do you size a position from a stop loss?

Decide the fraction of the account you will lose if the stop is hit, measure the distance from entry to stop, and divide. That one line of arithmetic, applied to every trade, does more for a trader’s survival than any entry signal. The course works it through for stocks, futures, forex and options.

Why do professional desks use loss limits?

Because one bad day can undo a good month, and judgment is worst after a loss. Bank desks and prop firms stop traders at daily and monthly limits as a matter of routine. The course has you write your own limits and the rule that enforces them.

How do you calculate a trading edge?

A trading edge is the one thing every trader claims and few can show. It means a positive expected result per trade, after costs, that persists. Whether you have one cannot be settled by how confident you feel or by last month’s results; it is settled by a record and some arithmetic.

Expectancy is the average result per trade: the win rate times the average win, less the loss rate times the average loss, less costs. A method that wins 40% of the time can have a large edge; one that wins 80% can have none. The course has you calculate it for real records and for your own.

Who is this course for?

Every trader on the trader path, and any trader whose results swing more than their method explains. No programming is needed.

What you will be able to do

• Place a stop loss from the structure of the trade rather than a round number of dollars.
• Size a position so that a stopped trade loses a fixed fraction of the account.
• Use the average true range to set stops and sizes that adapt to volatility.
• Set daily, weekly and monthly loss limits and the rules that enforce them.
• Explain how gaps, slippage and leverage can make a loss larger than planned.
• Calculate the expectancy of a method from its win rate, average win, average loss and costs.

Syllabus, module by module

1. Risk per trade

   Fixed-fraction risk, why 1 to 2% is common, and what larger fractions do to drawdowns.

2. Placing the stop

   Structure stops, volatility stops, time stops, and the stop you should never use.

3. From stop to size

   The sizing formula in arithmetic, for stocks, futures, forex and options.

4. Expectancy

   Average result per trade, after costs, from win rate and payoff.

What every course contains

Every paid course comes with the first seven and the certificate, whichever level it sits at. The proctored exam and the credential come when the course is taken as part of a Certificate, Diploma or Fellowship. Everything is self-paced: the material is yours to study in any order, at any hour, for the whole of the license.

1. Workbooks. Written to train the thinking patterns and the important concepts of the course, with worked problems and the reasoning behind each answer, so that you learn to think the way the subject is thought.
2. Audio edition. Focused, well-presented recordings with explainers and examples of the material, made to be interesting, relevant and entertaining, so that the general subject can be learned away from the desk.
3. Notes. Pre-produced notes with every fact the course relies on, written out in full, so that nothing has to be transcribed from the films or the audio.
4. Cheat sheet. One sheet with every important learning concept of the course on it, to keep beside you during the work and to revise from before the exam.
5. Named sources. Every fact in the notes names its source, the paper, the book or the dataset, for anyone who wants to dig in further.
6. Explainer films. Focused films, in the style of the sample films on the catalog page, that walk through the most difficult concepts of the course with visual explanations of a high standard.
7. Transcript. A full transcript of every film and every audio recording, searchable and quotable.
8. Proctored exam. Taken as part of a Certificate, Diploma or Fellowship, the course ends in a proctored multiple-choice questionnaire, with a pass mark of 60% and three retakes included. A course taken on its own is assessed by its coursework and has no exam.
9. Verifiable certificate. A certificate of completion that a third party can verify: an employer sends the code on it to the credentials office and receives written confirmation of the course, the date and the result.
10. Credential of the program. The Certificate, Diploma or Fellowship of the program, track or path the course belongs to, awarded when every course in it is passed. Which one depends on the program you choose.

How the certificate is earned

Unit quizzes and two graded problem sets: a sizing worksheet applied to twenty trades, and a written risk policy for your own trading. On a pass you receive the Course certificate in Stop Losses, Position Sizing and Your Trading Edge, issued by the Institute with a verification code. A course taken as part of a Certificate, Diploma or Fellowship ends in a proctored online exam with a pass mark of 60%. The fee includes three retakes; each attempt after that carries a reduced proctored exam fee. A course taken on its own is assessed by its coursework and has no exam. Read how certification works.