CADET · Module F02: Your First Trading Decisions · About 30 minutes
Safety rule: A stop-loss helps plan an exit but cannot guarantee the maximum loss. Prices can jump, orders can slip and some products can lose more than the funds initially provided.
Your mission today
Learn to estimate possible loss before entering a practice trade, understand a stop-loss in simple words, and recognise when a trade is too big.
1. Make the loss number visible first
Imagine someone offers you a game. You could win $10, but you don't know how much you could lose. Would you play without asking? Trading deserves the same caution.
Before a trade, ask: “If the price goes against me, how much of my money could disappear?”
A price movement measured in dollars or points is not the same as your personal cash loss. Your loss depends on how much you bought or sold. We learned this in F02.2. Now we put the ideas together.
2. A stop-loss is an exit plan, not a force field
Suppose you buy a pretend share at $50. You decide that if its price falls toward $48, you want to leave the trade. Your chosen stop is $2 below the buying price.
The stop distance is $2 per share. If you hold ten shares, your planned price loss is about $20 before fees or a worse-than-expected fill.
A stop-loss order can help execute that plan automatically. But it does not promise execution at exactly $48. The market might jump straight from $49 to $46, for example. You might be filled at a less favourable price.
Simple translation: A stop is an instruction for what you intend to do when you're wrong. It is not insurance that limits every possible loss.
3. The beginner sizing calculation
For a simple share example, use this practice formula:
Approximate planned loss = Number of shares × Price difference to your stop.
If you buy at $50 and want to leave near $48, the difference is $2.
- 1 share × $2 = $2 planned loss.
- 5 shares × $2 = $10 planned loss.
- 10 shares × $2 = $20 planned loss.
- 50 shares × $2 = $100 planned loss.
You can also work backward. If your example loss budget is $20 and your stop distance is $2, you would calculate 10 shares as the largest simple size before accounting for costs and possible price gaps. This is a teaching calculation, not a recommended risk budget or live trading instruction.
Other products have different contract multipliers and currencies. Never assume the simple share formula works unchanged for forex lots, futures or CFDs.
4. What if the size doesn't fit?
Suppose a platform only allows a trade size that could lose $100 on your chosen stop, but your imaginary exercise budget is $20. Don't squeeze the stop closer only to make the numbers look nice. That changes the trade and may cause an unnecessary exit.
The appropriate beginner decision is: skip the trade. There will be more examples to study. Learning to skip is a skill, not a failure.
Also consider a losing sequence, not just one trade. Four planned $20 losses total $80 before costs. Real losses can be larger. If losing that amount would affect rent, food, bills or sleep, the activity is already too risky.
5. Risk is bigger than a number
Prices can gap, brokers can have outages, liquidity can disappear, and humans make errors. Your own situation matters too. Money needed for essentials, debt repayments or emergencies should not be put at risk in speculative trading.
Cadet's goal is not to find a perfect stop. It is to develop the habit of thinking about the downside before thinking about profit.
Practice mission
Use pretend shares with no leverage. Buying price is $80 and your planned exit is near $76.
- What is the difference per share? $4.
- What is the approximate planned price loss for 3 shares? $12.
- For 10 shares? $40.
- If your exercise budget is $15, is 10 shares suitable? No.
- Is the stop guaranteed to fill at $76? No.
Before your next lesson
You should be able to work out a simple planned loss in dollars and explain why actual losses may be bigger.
Coming next: Putting all the pieces together into a calm, repeatable practice routine.
