The Maths Every Day Trader Should Know
What am I actually risking on this trade?
Connect entry price, stop distance, position size, cash risk, and R so every trade starts with an understandable money decision.
By ContextChart Research · 4 min
Published
Turn a price distance into money
Try it yourself
Planned price loss · 1R
$120.00
Before execution costs or an exit beyond the planned stop.
Position size
3.00 units
20 points × $2.00 per point × 3.00 units.
Margin is collateral. This calculation describes the price loss at the planned stop; it does not make that exit price certain.
A constructed example. Change the inputs to explore the relationship; these are not suggested trade settings.
The idea
A chart tells you how far price has moved. Your position size determines what that movement does to your account.
Start with an illustrative trade. Your planned stop is 20 points away. One unit of the instrument gains or loses $2 for each point. Holding three units makes the planned price loss $120: 20 points, multiplied by $2, multiplied by three.
That $120 is a useful reference. Call it one R: the money you planned to risk on the trade before entry. A $240 profit is +2R. A $60 loss is −0.5R. Each result becomes understandable beside the risk that produced it.
Keep the original reference when reviewing the trade. Moving a stop later does not rewrite what the position initially risked. Otherwise the measuring stick changes along with the result.
The broker's margin requirement answers another question: how much collateral must you provide to hold the position? A small margin requirement can support a position whose price movements have large cash consequences. Margin, position value, and planned loss are different quantities.
A stop distance describes a price move; position size turns that move into money at risk.
How this experiment works
Change the stop distance and position size separately. First keep size fixed and move the stop farther away. Watch the planned cash loss grow. Then keep the cash budget fixed and see how a larger distance requires a smaller position.
The controls are an arithmetic example, not suggested trade settings. The useful skill is translating between the chart and the account before placing an order.
How we use this
At ContextChart, risk and trade outcomes are separate parts of the measurement. Our research reports outcomes in R so different-sized price moves can be compared on a stated basis. Our trading systems also carry the planned stop and position information needed to assess exposure.
R makes comparisons more useful. It does not, by itself, say whether the market forecast was correct or whether the trader has skill. Those need their own evidence.
Show the maths
For a linear contract, in the account currency:
Planned price loss = stop distance × cash value per price unit × position size
Position size = planned cash budget ÷ loss per position unit
Realized R = realized net profit or loss ÷ initial planned cash risk
Use the instrument's actual contract specification and currency conversion. Include costs consistently. CME's position-sizing lesson illustrates the same connection between stop distance, contract value, and size.
What this does not establish
A planned stop is a reference for risk, not a guaranteed exit price. Gaps, slippage, fees, and financing can make the eventual loss different. A loss beyond −1R can occur even when a stop was present. Account separately for what the trade really costs.