Decide the loss before the size

A chart idea can look attractive before anyone asks what it could cost. This lesson changes the order. First decide the planned cash loss, then identify where the idea would be invalidated, then calculate a permitted size. The question is not “How large a position can the platform let me open?” It is “What would this position lose under my stated exit assumptions, and what could make that loss larger?”

All balances, prices and percentages here are invented demo examples. A 1% example is a convenient calculation, not a recommended risk level or evidence that trading is suitable for you. Money for rent, food, healthcare, education, emergencies or loan repayments belongs outside a trading experiment. A percentage of money you cannot afford to lose is still money you cannot afford to lose.

Planned risk is the estimated cash loss if a stated position closes at its stated adverse exit, plus the charges included in your model. It is different from the price distance alone, the required margin and the full face value of the position. Choose one account currency and keep every component in that currency before adding it. Write whether your budget uses a fixed amount or a percentage, and what account value supplies the percentage.

A planned stop loss is not a guarantee of the final loss. A gap, changing conversion rate, commission, financing or poor fill can alter the result. “Maximum planned loss” means a limit in the worksheet under the worksheet assumptions. It does not mean the market or provider has promised a maximum payable amount. Keep a separate adverse-fill scenario rather than hiding that difference.

Balance generally records closed transactions and booked account adjustments. Equity includes the effect of open positions under the platform’s rules. A simple teaching account with no credit adjustments has equity equal to balance plus floating profit or loss. An open loss is not harmless simply because it has not appeared as a closed trade in the balance. The account is already exposed to it.

Read the provider’s treatment of commission, credits, swaps and blocked amounts. The simplified equation is a teaching aid, not a substitute for the account agreement. If you choose an equity-based demo policy, record equity before sizing each new idea and include the risk of positions already open. Lesson 2 will connect these account values to margin.

An invalidation point is a price or condition that contradicts the particular idea you are testing. The chart lessons taught you to define rules before seeing later prices. Use the same habit here: describe the intended entry, the condition that would make the idea wrong and how an exit order would operate. A stop placed solely to obtain a bigger lot count does not make the idea stronger.

Use the distance from the executable entry side to the planned exit side. For a conventional retail quote, a long enters at ask and exits by selling at bid; a short enters at bid and exits by buying at ask. Confirm trigger rules and whether the chart displays bid, ask or another series. A drawn line measured from a different price series can understate the distance you would actually pay.

Forex quotations express quote currency per one unit of base currency. Under a conventional linear contract, base units multiplied by an adverse price change give the price loss in quote currency. Convert that result into the account currency. A standard lot often represents 100,000 base units in the examples here, but the actual contract specification controls. A lot, a pip, a point and a unit are not interchangeable.

For EUR/USD, a conventional pip is 0.0001 USD per euro. A 20-pip distance is 0.0020. Thus 5,000 euros × 0.0020 USD per euro equals US$10. On many JPY-quoted pairs a conventional pip is 0.01 yen, so reusing 0.0001 would be a serious unit error. Check the Pip Value Calculator’s instrument definition before comparing results.

Divide the cash budget by the cash loss for one unit or one standard lot at the proposed stop distance. The denominator and numerator must use the same account currency. Then round down to a permitted volume step. Rounding to the nearest step can round upward and exceed the budget. Check the minimum, maximum, step and contract size separately; a computed number is not automatically an allowed order.

A price-only size may consume the whole budget before commission or a worse exit is considered. Build one coherent price convention. If the entry is the actual ask and the stop exit is the actual bid, their distance already reflects those sides: do not add the same spread a second time. If you start from a mid-price or bid chart, work out the executable-side adjustment first. Record round-trip commission, financing for the assumed holding period and any conversion charge separately.

If a provider has a minimum fixed commission, charges may not shrink proportionally with volume. Calculate allowed sizes one by one until the price loss plus the chosen cost allowance fits, or select no position. Recheck after partial fills and partial closes. A platform accepting the order only proves that its current acceptance conditions were met.

Conversion answers a simple question: how much account currency is one unit of the loss currency worth under the stated rate? Multiply a USD loss by CAD per USD for a CAD account; divide a JPY loss by JPY per USD for a USD account. Do not multiply merely because a rate field exists. Write the units beside the rate and cancel them on paper.

A rate supplied to a calculator may be quote currency to account currency, not the currency pair’s displayed market price. Use a supported instrument and account currency, read the conversion guidance and verify the result with a small paper example. Conversion can change between the plan and the exit, so record the rate and timestamp rather than treating it as permanent.

A target is a proposed favourable exit, not money already earned. Reward-to-risk divides proposed cash gain by planned cash loss using consistent charges and fill assumptions. A ratio of 2 means two units of proposed gain for one unit of planned loss. Some displays call this “risk-to-reward 1:2”; others show “reward/risk 2.” State your convention to prevent the same numbers being read backwards.

Expectancy is an average outcome under a stated model: win probability times average win minus loss probability times average loss. It is not the profit of the next trade. In the simplest two-outcome model, ignoring costs, break-even win probability is loss divided by win plus loss. With a proposed win of US$20 and loss of US$10, this is 10/30, or about 33.3%. Real outcomes may include partial exits, gaps, time exits and varying sizes.

At 40%, the arithmetic is 0.40 × 20 − 0.60 × 10 = US$2. If a hypothetical US$1 charge applies to every trade, net expectancy becomes US$1. Net outcomes are +US$19 and −US$11, so break-even is 11/30, about 36.7%. Do not subtract that cost again if the averages already include it. A historical win rate from a few selected trades is not a reliable future probability.

Suppose the cash budget is US$1, distance is 20 pips and the minimum is 0.01 EUR/USD lot. The minimum price loss is US$2 before costs, already above the budget. The answer is not to round up or borrow another envelope. Under that worksheet the permitted size is zero. A demo calculation can be valuable even when it rules out the position.

Pending orders also belong in the plan: several orders may activate during the same move. Treat a staged entry as one idea where appropriate and calculate its total risk if all intended portions fill. Check whether orders truly cancel each other, and how a netting or hedging account handles them. Moving a stop to the displayed entry does not guarantee zero cash loss because fees and a worse fill can remain.

Keep the final pre-order record: account reference and currency; idea and invalidation; entry/exit side; stop distance; contract and pip value; conversion; costs; permitted step; rounded size; total existing exposure; and a decision to proceed in demo or skip. Lesson 3 will show why several individually small positions can still create one large shared risk.