The figures in this note are invented to teach arithmetic. The percentage, prices and size are not recommendations. The exercise is not an assessment of what you can afford to lose.
A useful calculation needs visible assumptions
Suppose a fictional practice account contains 10,000 units. For the purpose of this exercise only, assign 0.5% of that number as a planned loss amount. The arithmetic gives 50 units. That is a modelling assumption, not a suitable risk level for any particular person.
Now suppose a hypothetical share has an entry price of 25.00 and a planned exit at 24.50. The difference is 0.50 per share. Dividing 50 by 0.50 gives 100 shares. At the invented entry price, their notional value would be 2,500 units.
| Term | Invented calculation | Interpretation |
|---|---|---|
| Planned loss amount | 10,000 × 0.005 = 50 | The exercise’s assumed budget. |
| Planned price difference | 25.00 − 24.50 = 0.50 | The assumed per-share movement. |
| Illustrative size | 50 ÷ 0.50 = 100 | Shares in this simplified model. |
| Notional value | 100 × 25.00 = 2,500 | Exposure, not a guaranteed maximum loss. |
Where the tidy answer can fail
The calculation assumes an entry at 25.00, an exit at 24.50 and no extra costs. A real instruction might fill elsewhere, fill partly or fail to execute. Prices can gap across a level. Fees, spread, taxes and currency conversion can change the result.
A stop order becomes a market order when triggered. Its trigger level is not a guaranteed execution price. A stop-limit order adds a price condition and can remain unfilled. Neither instruction makes a planned loss amount an absolute cap.
Leverage, short selling and derivatives introduce risks that this share example does not model. Depending on the product and applicable protections, losses may exceed the initial amount committed. This exercise is deliberately not a model for those products.
Add a cost assumption
For a second paper calculation, assume total entry-and-exit costs of 0.10 per share. The modelled loss per share becomes 0.60. Dividing 50 by 0.60 gives 83.33; using whole shares and rounding down gives 83. The modelled total at those assumptions is 49.80 units.
This is a more explicit calculation, but still not a worst-case loss estimate. It has not modelled a gap, a failed order, changing liquidity or the possibility that the chosen assumptions are wrong.
Try a different assumption
Keep 83 fictional shares and the 25.00 entry. Suppose the actual hypothetical exit is 24.20 and total costs are still 0.10 per share. What would the modelled loss be?
Read the worked explanation
Write the caveat beside the answer
When you record a practice calculation, include its assumptions on the same line. State what has not been modelled. The most useful result is often a clearer understanding of uncertainty, rather than an impressive-looking position size.
Primary sources & scope
- Investor.gov — Stop, Stop-Limit, and Trailing Stop Orders: trigger and execution limitations.
- Investor.gov — Understand What It Means to Invest: the presence of investment risk.
All figures, model assumptions and exercises are original and hypothetical. No level of loss, capital or exposure is recommended.