With the same quantity the loss is the same; only liquidation moves closer
Caution
1% is a commonly cited example, not a recommended rate
Decide in reverse order
Many people first decide how much to buy and think about the stop later. The order commonly used in risk management is the reverse. First decide how much you can afford to lose on this trade, next pick the stop level on the chart where you would consider your idea proven wrong, and finally calculate the quantity from those two. That way, whether the stop is wide or tight, the amount you lose if it is hit equals the amount you set in advance. The reason for reversing the order is emotion. If you set the quantity first, you end up pulling the stop toward wherever that quantity can bear, placing it at a spot that means nothing on the chart or putting it off altogether. If instead you find the stop on the chart first and fit the quantity to it, the stop keeps its meaning as the sign that your call was wrong, and the amount stays where you planned. A common illusion is that more conviction justifies a bigger size, but conviction changes neither the stop level nor what you lose if you are wrong.
① How much you can afford to lose on one trade
② The stop level (from chart structure or volatility)
③ Quantity = ① ÷ (entry price − stop price)
Worked example: a $10,000 account
If your account holds $10,000 and you decide to lose no more than 1% of it on any one trade, the loss you can absorb is $100. The 1% is only a commonly cited example, not a recommended rate. If, as in the figure, you enter at $100 and stop out at $95, the risk per unit is $5, so the quantity is $100 ÷ $5 = 20 units and the position is worth $2,000. If you place the stop at $90 instead, the risk per unit is $10, so the quantity drops to 10 units and the position to $1,000. The farther away the stop, the smaller the position. It is important not to confuse the position value with the amount at risk. Buying $2,000 worth does not mean betting $2,000; as long as the stop holds, the money at stake is $100. Conversely, if the stop is very close, the calculated quantity can exceed what your balance can buy. In spot trading the quantity is capped by your balance, so the actual risk ends up smaller than planned.
Illustration: entry at 100, with the stop at 95, below the lowest low of this stretch (96.2). The risk per unit (1R) is 5, so a target of 105 is +1R and 110 is +2R. The quantity is set by dividing the loss you can absorb by 5.
Stop placement: structure or volatility
There are two broad ways to choose a stop level. One is structure: for a trade that expects a rise, place it where the reason for that expectation disappears if price breaks it, such as below the latest swing low. The other is volatility: place it some multiple of the ATR (average true range, how far a single bar typically moves) away from the entry. A stop tighter than the usual fluctuation is easily hit by meaningless noise. Using 2 to 3 times the ATR is a common example, but it is only an example; details are in the ATR article. Raising the stop along a Supertrend line, which is built from ATR, follows the same idea. Structural stops work because many participants are watching the same low. When it breaks, stop orders tend to fire all at once and the move often widens, so many people leave a little extra room below the low. Using both methods together is also common: find the structural level first, then measure that distance in multiples of the ATR to check whether it is too close or too far.
R multiples: recording profit and loss in units of risk
R is a unit in which the amount you decided to risk at the start of a trade counts as 1. In the example above 1R is $100 ($5 in price terms), so selling at $105 is +1R, selling at $110 is +2R, and being stopped out is −1R. Recording results in R lets you compare trades of different sizes and work out the expected value of a whole set of rules. For example, with a 40% win rate, an average win of +2R and an average loss of −1R, the expected value per trade is 0.4 × 2 − 0.6 × 1 = +0.2R. But win rate and payoff ratio are linked (the farther away the target, the less often it is reached), so changing only one of them in the calculation gives the wrong answer. Recording in R also shows whether your stops were respected. If losses larger than −1R show up often, you are either delaying stops or suffering heavy slippage. Thinking in R when setting targets also makes a plan with a payoff ratio below 1 obvious at once, such as a stop $5 away with a target only $3 above.
Leverage does not change the size of the loss
If you close the same quantity at the same stop price, the loss is the same regardless of leverage. A $2,000 position needs $1,000 of margin at 2x and $200 at 10x, but if it is stopped out at $95 you lose $100 either way. What leverage changes is the margin required and the distance to the liquidation price. For an isolated-margin long, the liquidation price is roughly entry price × (1 − 1/leverage + maintenance margin rate), so at 25x in a tier with a 0.4% maintenance margin rate it sits about 3.6% below the entry. Liquidation comes before a stop placed 5% below. The Futures Liquidation Calculator lets you check which one would be reached first. A common illusion is that raising leverage is itself the risk. More precisely, it lets you take a larger quantity with the same margin, and it is that larger quantity that raises the risk. If you have calculated the quantity from the amount at risk, leverage is left as a question of how much margin to tie up, and the remaining check is whether the liquidation price sits farther away than your stop.
The arithmetic of losing streaks
Even with a 50% win rate, losses do not arrive evenly spread out. If you simplify trades to coin flips, the chance of at least 5 losses in a row within 10 trades is about 11%, and within 100 trades about 81%. In other words, if you trade long enough, you are likely to go through a streak such as five straight losses at least once. This is where the size of the risk per trade makes the difference. If you lose a fixed percentage of your balance each time and lose 10 times in a row, the balance left is as shown below. From about 60% you need a gain of about 67% to get back to even, and from about 35% a gain of about 187%. Losing streaks are dangerous more because of behavior than numbers. After a few losses in a row it is common to raise the risk to win it back quickly or to change the rules, and then the balance shrinks far faster than the list above. That is why some people decide in advance on a rule to pause trading after a certain number of consecutive losses.
1% each time: about 90.4%
2% each time: about 81.7%
5% each time: about 59.9%
10% each time: about 34.9%
Actual losses can be larger than planned
The calculated loss assumes a fill exactly at the stop price. In reality, entry and exit fees are added, and when price moves fast there is slippage, where the stop order fills at a worse price than the stop. Crypto trades 24 hours a day, but when mass liquidations cluster the order book can empty out in a short time and price can slip a long way. So a common approach is to leave room for these gaps when setting the loss you can absorb. A backtest also has to include the same costs for the plan and the result to match (see the backtesting article). There are three things to check: whether you added round-trip fees to the calculated −1R, whether the asset's trading volume is enough relative to your quantity, and whether your stop sits where other people's stops are likely to be clustered. On thinly traded coins, even a small quantity can push through several price levels in the order book. Also know the difference between stop types: a market stop can suffer larger slippage, while a limit stop may not fill at all if price jumps past it.
What this article does not tell you
This article shows how to calculate the quantity once the amount at risk has been set; it is not advice on how much to risk. Numbers such as 1%, 2 to 3 times the ATR and +2R are examples chosen to show the calculation. The right size differs from person to person, depending on whether the money is needed to live on and how large a loss you can bear. How leverage and liquidation magnify losses is covered separately in the coin topic's article "What happens when you trade with borrowed money". When choosing a number, a common approach is to calculate the bad cases first, like the losing-streak list above, and ask whether you could accept the result. It is also worth considering that the same 1% means different things depending on whether your whole balance is money you invest or only a portion set aside for trading. Changing the number in the middle of a trade or right after a loss makes the calculation itself meaningless.
What looks different in crypto and stocks
Even with the same formula, the assumption that a stop fills at the stop price breaks in different ways in different markets. Crypto trades 24 hours a day, so stop orders work overnight, but with stocks, news that comes out outside the regular session is priced in all at once at the next day's open. Even large caps such as Samsung Electronics or SK Hynix can open well below a stop after an earnings release, and then the loss exceeds −1R. US stocks have extended-hours trading, but it is thin, so gaps at the regular-session open are common. Korean stocks have a daily price limit (±30%), and when a stock is locked at the lower limit you may not be able to sell that day; crypto and US stocks have no such per-stock limit. Volatility differs too. The larger an asset's ATR relative to its price, the farther a stop set at the same ATR multiple sits in price terms, and the smaller the quantity becomes. Leverage works differently as well: crypto futures allow dozens of times leverage, while stock margin trading offers lower multiples but has its own rules for forced liquidation when collateral falls short. Korean stocks must also be bought in whole shares, so a calculated quantity cannot be matched down to fractions.
A practical checklist
Checking in the order below before placing an order makes it less likely that the calculation gives way to how you feel at the moment. When setting a stop on a live chart, be careful with the bar that is still forming. The low of an unclosed bar can keep dropping, so a stop placed from that low may already be meaningless a few minutes later. The ATR also wobbles when the forming bar is included, so calculating from closed-bar values is more consistent. Writing the amount at risk, stop price and quantity on one line before the order lets you convert the result into R right after the fill. Price sometimes touches the stop within a forming bar and then climbs back, so decide in advance whether the stop triggers the moment price touches it or only on a close. With a close-based stop, the loss can exceed −1R.
① Have you written down, as a number, how much you can afford to lose on this trade?
② Can the stop level be explained by chart structure or volatility?
③ Did you calculate quantity = amount at risk ÷ (entry price − stop price)?
④ Can you still absorb the loss with fees, slippage and gaps added?
⑤ If you use leverage, is the liquidation price farther away than the stop?
⑥ Have you decided in advance whether to keep the same size through a losing streak?