The Mathematics of Survival: Risk Management in Stocks & CFDs

THE LOGIC OF POSITION SIZING

Many CFD traders confuse 'Risk' with 'Margin'. They think, 'I have $1,000, so I can buy $10,000 worth of Apple with 1:10 leverage.' This is the fastest way to blow an account. Correct position sizing starts with your Stop Loss, not your buying power.

THE FORMULA

Position Size = (Account Equity × Risk %) / (Entry Price - Stop Loss Price)

Let's apply this to a real scenario. You have a $10,000 account and want to buy Tesla (TSLA) at $200. Your technical analysis says the trade is invalid if it drops below $190.

1. Risk Amount: 1% of $10,000 = $100.
2. Stop Distance: $200 - $190 = $10 per share.
3. Shares to Buy: $100 / $10 = 10 Shares.

Notice that leverage didn't enter the equation? It doesn't matter if your broker gives you 1:5 or 1:500 leverage; the math dictates you can only buy 10 shares to stay within your risk parameters. Leverage is simply a tool to reduce the margin requirement, not a license to trade larger.

MANAGING DRAWDOWNS

When you enter a losing streak (drawdown), your risk management must adapt. If your account drops from $10,000 to $9,000, your 1% risk drops from $100 to $90. This 'anti-martingale' approach ensures that you trade smaller when you are trading poorly, and larger when your account is growing. This natural braking mechanism is the only thing standing between a bad month and a blown account.