In short
The formula
Position size is calculated so that if the stop is hit, the loss equals exactly the planned risk:
Position size = (risk % / stop %) × account
Risk is the share of the account you're willing to lose on this trade. Stop is the distance from entry to stop as a percentage.
Example
The account is $1,000. You plan a long on ETH at $2,000 with a stop at $1,900 — price has to fall 5%. Risk per trade is 2% of the account, or $20.
2% / 5% × $1,000 = $400. If the stop is hit, $400 × 5% = $20 lost — exactly 2%.
Second example: a $5,000 account, $100 risk (2%), a 5% stop. (2% / 5%) × $5,000 = $2,000.
What about leverage
Leverage doesn't add risk if the position is sized by the formula. A $2,000 position can be opened with your own money or with 10× leverage on $200 of margin — if the stop is hit, the loss is the same $100. Leverage is dangerous when size is chosen "by feel": 150× with no stop isn't trading, it's a lottery that ends in liquidation.
How to apply it
The most expensive thought in trading: "I'll go bigger, I'm sure about this one". Confidence doesn't change probability. The loss on that trade ends up several times larger than usual.
Common mistakes
Setting the stop to fit the size you want
First the stop by structure, then the size. Never the other way round.
Same size for different stops
With a 2% and an 8% stop, the same position means a fourfold difference in risk.
Forgetting fees
With tight stops, fees noticeably increase the real risk.