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4. Position size and the cost of mistakes

Start with money at risk

For a hypothetical linear long, use balance D = 1000, practice risk 0.5%, entry E = 100 and stop S = 98. The money budget is R = 1000 × 0.005 = 5. The 0.5% figure is chosen solely for this exercise and is not a personal risk recommendation. Stop distance is 2 per unit of the instrument.

Add hypothetical total costs and an execution reserve of 0.50 per unit. In this model, these already include the assumed fees and reserve; do not add the same costs twice. Unit risk is 2 + 0.50 = 2.50. Maximum q = 5 / 2.50 = 2. With a quantity increment of 0.1, this is already valid. If the result is 2.06, round down to 2.0, then check minimum size and instrument specifications.

For a separate exercise exiting the entire position at T = 104, net potential per unit is 104 − 100 − 0.50 = 3.50. Net potential divided by planned risk is 3.50 / 2.50 = 1.4. Without costs it would be 2. These are different calculations, not an interface error. Both describe a plan rather than a guaranteed outcome.

Recheck a changed entry

If the available price is already 103 with the same S = 98 and T = 104, less potential remains and more is at risk. You cannot record a fill at the old price of 100. Recalculate quantity, costs and the ratio, or skip the situation. Increasing leverage does not restore the potential that has disappeared.

Check margin separately after sizing. Having sufficient collateral does not establish that money risk is acceptable. A real operation also requires stop-trigger, liquidation, price-increment and funding rules. The exam only requires you to demonstrate the arithmetic on paper.