Understand the exact mechanics before you ever touch the button.
What you will learn
Master leverage ratios and liquidation
Understand short-selling mechanics fully
Compute position size from risk
Why losses hurt more
Why losses hurt more
Risking a fixed % per trade
Risking a fixed % per trade
Leverage is a loan
Leverage is borrowing to increase position size. The exchange lends you the asset or capital; you post margin as collateral. The leverage ratio tells you the multiple. The catch: your collateral must cover losses, or the position is closed automatically.
💡 Reading the numbers
You have $1,000 and open a 10x long. You control $10,000. Initial margin = 10%. If the position loses 10% ($1,000), your equity is gone and you're liquidated. The 'leverage' number is literally '1 ÷ the move that kills you.'
Short selling mechanics
To short: you borrow the asset from the exchange, sell it at market, and later buy it back to repay. Your profit is sell price − buy-back price. You pay borrowing interest, and if the price rises, you must buy back higher — a loss that can exceed your margin.
The asymmetric risk
Long risk is capped (asset can only go to zero: −100%). Short risk is unbounded (price can rise infinitely). This asymmetry is why shorts require more discipline, tighter stops, and smaller size than longs.
Position sizing from risk
The disciplined formula: position size = (account × risk %) ÷ stop distance. Risk 1% of a $10,000 account = $100. With a 5% stop, size = $100 ÷ 5% = $2,000. You never risk more than your predetermined amount, regardless of conviction.
💡 Why sizing beats predicting
You don't need to predict the future to survive — you need to survive your mistakes. Fixed-fraction risk sizing ensures that even a string of losses only shaves a small, survivable % off your account. Consistency of risk, not accuracy of prediction, is the edge.
❓ Quick check
The formula for position size from risk is:
A) account × risk% × stop
B) (account × risk%) ÷ stop distance
C) account ÷ leverage
D) risk% × leverage
Size = (account × risk%) ÷ stop distance.
(Knowledge check — full exam is next)
Key takeaways
Leverage = 1 ÷ the move that liquidates you
Short risk is unbounded; long risk is capped
Position size = (account × risk%) ÷ stop distance
📝 Weekly Exam — pass with 80% to unlock next week
10 questions. Review the Deep Dive and courses before attempting.
1. Leverage is essentially:
Leverage = borrowed position size.
2. 10x leverage means a ___ adverse move liquidates you:
100/10 = 10%.
3. The maximum loss on a long position is:
Long loss capped at 100%.
4. The maximum loss on a short position is:
Price can rise without limit.
5. To short, you first:
Borrow → sell → buy back later.
6. Risk 1% of a $10,000 account equals:
1% of 10k = $100.
7. With a 5% stop and $100 risk, position size is:
100 / 0.05 = $2,000.
8. Why does fixed-fraction sizing beat prediction?
Survivability is the edge.
9. Shorting requires more discipline because:
Asymmetric, unbounded risk.
10. The leverage number can be read as:
It defines the fatal move.
Your score: —
🛠 Weekly Project
Build a position-sizing calculator in your journal.
1
Define your demo account size and a 1% risk budget.
2
Pick 3 trades with different stop distances (2%, 5%, 10%).
3
Compute the position size for each using the formula.
4
Write one sentence on how the formula changed your sizing instinct.