Risk and position sizing
The fastest way to wreck a good edge is to bet too much on any single fast trade. Sizing, not setup-hunting, is what keeps a short-term strategy alive long enough to work.
A short-term strategy will be wrong often — even a strong one closes a meaningful share of trades at a loss, and on a fast clock those losses cluster fast. The job of risk management is to make sure no single loss, and no short burst of them, can take you out before the edge has time to show. That means deciding in advance what fraction of the account any one trade may risk, and sizing each position to honour that cap rather than to chase the setup that looks most exciting on the tape.
Two numbers do most of the work: the per-trade risk (a small, fixed share of capital) and the drawdown you will tolerate before you stop and review. A short-term strategy quoted without a drawdown figure is hiding the only number that tells you whether its returns were survivable.
Position sizing, worked through with the arithmetic
Sizing sounds abstract until you run the numbers once. This is an illustrative example, not a specific recommendation — the method is what matters, and it uses different sample numbers from the walk-through on the method page on purpose.
- Fix the per-trade risk first. Decide that no single trade may risk more than 1% of the account. On a
$25,000account that is$250of risk per trade — a number set before any setup appears, not after one looks tempting. - Measure the stop distance. The rule names an entry of
61.20and a stop at60.66. The distance is0.54per share — this is the actual loss per share if the stop is hit, and it is what converts a risk budget into a position size. - Divide to get the size. Position size = risk budget ÷ stop distance. The arithmetic does the rest.
- The cap holds regardless of the setup. A “better-looking” chart does not earn a bigger bet; the size falls straight out of the stop distance and the fixed 1% budget.
risk budget = 1% × $25,000 = $250
stop distance = 61.20 − 60.66 = 0.54 per share
position size = $250 ÷ 0.54 ≈ 463 shares (≈ $28,300 notional)
if the stop is hit: 463 × 0.54 ≈ −$250 = the 1% you budgeted, no more.
Notice the trade can use more notional than the cash in the account and still only risk 1%, because the risk is the stop distance, not the position value. That is the whole point of sizing from the stop: a wide stop forces a smaller position, a tight stop allows a larger one, and the dollar risk stays flat across both.
How a conviction grade maps to size
A flat strategy risks the same amount on every trade. A graded one can do better: it can lean harder on its strongest calls and lighter on its weakest, because it has measured which is which. On the systematic models here, the A-to-D conviction grade gives a reader a built-in sizing signal. A workable way to read it: treat your per-trade cap as the ceiling an A call may use, then step down for weaker grades — an A might use the full 1%, a B around three-quarters of it, a C half, a D a token quarter or a pass. The grades and their per-clock bars look like this:
| Model | Holding clock | Grade-A bar (per trade) |
|---|---|---|
| Day Trade | opened and closed in the same session, inside a 0 to 60 minute window | 0.70% avg / trade |
| Multi Hour | carried from half a session to about two sessions | 4.50% avg / trade |
| Swing Trade | held roughly 7 to 28 days | 6.00% avg / trade |
| Investing | carried over a long horizon | long-horizon |
An A sits at the top band of a model’s own measured return spread; a D is the lowest band still published. Because the bar is tuned to the clock, an A on a 0–60 minute Day Trade call (near 0.70% a trade) and an A on a multi-week Swing call (near 6.00%) both read as “top-band for this horizon,” rather than one absolute target stretched across very different holding times. There is no E grade — it was retired from the live product so the four-letter scale keeps its meaning.
Stepping the size down with the grade does not replace the per-trade cap — it works inside it. The cap protects you from any single loss; the grade tells you where, under that cap, the strategy itself would concentrate. A trader who can take only a few of the day’s calls uses the grade to spend the risk budget on the setups the model rates highest, instead of spreading it evenly across calls of very different quality.
What a bad version of this looks like
- Sizing by excitement. Betting big on the setup that feels best and small on the rest is how one bad call undoes a good week — the exact inverse of grading by measured returns.
- Fixed share counts. “Always 500 shares” ignores the stop distance, so a wide-stop trade quietly risks several times what a tight-stop trade does, even though both feel the same.
- No drawdown line. A strategy with no stated point at which you stop and review is a strategy that finds out it was over-sized only after the account is too small to recover easily.