Position size and value at risk

How it works

The position is sized so that a fall from the entry to the stop loses the share of the account you set: shares are the money at risk divided by the distance to the stop. Value at risk (VaR) is the loss the position should exceed only on the worst days at the confidence you choose (5% of days at 95%), from its annual volatility scaled to the holding period by the square root of time. Expected shortfall is the average loss on those worst days. The chart shows both across holding periods, with the loss at the stop as the reference line.

Assumptions

Parametric VaR assumes normally distributed returns with no drift; real returns have fatter tails, so large losses are more frequent than the model says. A stop is not guaranteed: prices can gap through it. Whole shares only, no fees or slippage. For learning, not for managing a portfolio.

For information and education only. Not investment advice.