What you will learn
- Cash risk and stop distance
- Reward-to-risk versus realized R
- Drawdown and recovery asymmetry
- Aggregate planned losses
Cash risk and stop distance
A planned cash budget divided by loss per unit gives an upper bound on quantity under the stated assumptions. Include multiplier, stop distance and a cost allowance. A stop is not a guaranteed price, so also calculate a worse-execution scenario.
Reward-to-risk versus realized R
Planned reward-to-risk compares a target distance with a stop distance after relevant costs. Realized R divides the actual trade result by the initial recorded risk budget. Moving the denominator after a loss would make comparisons inconsistent and hide the original decision.
Drawdown and recovery asymmetry
Drawdown measures decline from a previous equity peak. Recovery is measured from the smaller remaining balance. A 20% loss leaves 80% of the starting amount, requiring a 25% gain on the remaining amount to recover, before other cash flows.
Aggregate planned losses
Add planned losses across simultaneous positions to understand aggregate exposure. Related positions can lose together. The sum is a scenario under assumptions, not a guaranteed worst-case bound when gaps, correlations or funding conditions change.
Worked example
With a cash budget of 100, stop distance 2 and multiplier 10, price risk is 20 per contract. Add 3 estimated cost per contract: floor(100/23) gives four contracts, with planned cost-inclusive risk of 92.
Try it yourself
Repeat the example with a worse exit that creates a price distance of 3. Keep four contracts and costs of 3 per contract. Does the realized scenario still fit 100?
Show the worked solution
The scenario loss is four × (3 × 10 + 3) = 132. It exceeds 100. The original position-size calculation respected a planned stop assumption, but that assumption was not a guaranteed execution outcome.
Apply this to your course project
Produce a checked workbook of ten sizing and P&L cases, including losing trades.
Keep the calculation inputs, assumptions and decisions with your work. Practical exercises are self-reviewed; the scored knowledge checks assess the questions shown, not an independent certification of practical competence.