CIX FOUNDATIONS · LESSON 02 OF 04
Risk Before Reward.
Work through position size, leverage and execution with a practical example and a journal.
Start with the loss you have planned
A price target alone is not a trading plan. Define the idea, what would invalidate it, the planned exit and the amount you are prepared to put at risk. The position size follows those inputs.
A risk budget is a planning number, not a guaranteed maximum loss. Gaps, slippage, fees and product mechanics can make the realised result worse.
Work through the numbers
Use this hypothetical linear spot-style long: a $5,000 account, a $25 planned risk budget, a $5 cost reserve, a $100 entry and a $98 planned stop.
Price risk per unit: $100 − $98 = $2
Budget after estimated costs: $25 − $5 = $20
Quantity: $20 ÷ $2 = 10 units
Exposure at entry: 10 × $100 = $1,000
If the exit fills at $97 rather than $98, the price loss is $30. With $5 in costs, the total is $35. The plan was $25; the actual result is larger. These numbers illustrate the mechanics, not a risk percentage recommended for your account.
Separate exposure, margin and leverage
Exposure is the value affected by the market move. Margin is collateral required for a leveraged position. Leverage relates the two; it does not describe the full risk by itself.
A $30,000 linear position changes by about $300 for a 1% price move before costs. A $1,000 position changes by about $10. A lower leverage label can still accompany a much larger dollar exposure.
Liquidation rules depend on the product and venue, including maintenance margin, price reference, fees and collateral. Do not use a simple leverage shortcut as an exact liquidation calculation.
Plan the execution
A market order prioritises execution, without fixing the final fill price. A limit order sets an acceptable price, but can remain unfilled or fill only partially. Stop orders and stop-limit orders have different trade-offs. Check the specific venue's rules.
The last traded price is not necessarily the price available for your entire order. Include the spread, trading fees and any applicable funding or borrowing costs in the review.
Your task: calculate, then challenge
Try a $30 risk budget, $6 estimated costs, $100 entry and $97 planned stop. Calculate the quantity before reading the answer.
Check the answer
($30 − $6) ÷ ($100 − $97) = 8 units, or $800 exposure at entry. A worse exit or higher costs can still exceed the plan.
Then write a hypothetical trade journal: thesis, invalidation, planned risk, quantity, costs, actual fills and review. A winning trade can break a process; a losing trade can follow it. One result does not establish an edge.
The full field guide
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Sources and context
Original CIX teaching exercises. Educational information, not personal investment advice. Examples are hypothetical; investing and trading can result in losses. Refer to the rules of the specific product and venue.