Bruce Kovner: it all starts with the stop-loss

Bruce Kovner never opens a position without a predetermined stop-loss set on technical grounds. It is the stop that determines the size of the position, not the other way round. The formula: position size = risk accepted ÷ (entry price − stop-loss). With €200 of risk and a stop €0.50 below the entry, the maximum position is 400 shares.

In the stock market, many people believe the most important thing is finding THE winning strategy. They are wrong.

The most important thing is learning how to lose well. To lose:

• no more than you had planned
• under the conditions you had planned for

“When I get into a position, I have a predetermined stop — it’s the only way I can sleep. The position is determined by the stop, and the stop is determined on a technical basis.”

— Bruce Kovner

Whatever your strategy, whatever your investment horizon — scalping, day trading, swing trading or long-term investing — having a predetermined stop-loss set on technical grounds is essential.

What questions should you ask before opening a position?

Before entering a trade, answer these 5 questions in order:

1. Why do you want to buy? Which technical or fundamental criteria justify your purchase?
2. At what price do you want to enter? Define your entry point before placing the order.
3. At what level does your analysis become invalid? Below which price do you consider that the conditions that got you in no longer hold?
4. What are you hoping to gain? How high do you think the stock can go?
5. Is the game worth the candle? Is your gain/risk ratio good enough?

If you answered yes to the last question, all that’s left is to size your position — and place the order.

How do you calculate your position size?

Take the maximum amount you are prepared to lose on this trade — for example 2% of your portfolio, i.e. €200 for a €10,000 portfolio.

Divide that amount by the distance between your entry point and your stop-loss:

Position size = risk accepted ÷ (entry − stop-loss)

Example:

• Risk: €200
• Entry: €2.40
• Stop-loss: €1.90
• Distance: €0.50
• Result: 200 ÷ 0.50 = 400 shares maximum

With this method, you enter every trade with a controlled loss and a predefined potential gain. That is exactly what you want in the market: asymmetric outcomes, controlled risk.

Worked examples (€10,000 portfolio, 2% risk = €200)

In all four cases the maximum loss stays the same: €200. Only the number of shares changes. The stop really does determine the position.

Frequently asked questions