Risk management principle: determine position size based on the distance to the stop-loss level, not on conviction about the wave count.
Description
Even the best wave count is a probability, not a certainty. Position sizing based on stop-loss distance — rather than conviction — is the foundation of risk management in Elliott Wave trading. The stop-loss is placed at the level that would invalidate the current count.
Key Points
- Position size = acceptable loss amount ÷ distance to stop-loss
- Stop-loss placement: at the price level that would invalidate the wave count (e.g., below wave 1 start for a long in wave 3)
- Do NOT increase position size just because conviction is high — conviction is not certainty
- Use a fixed percentage of capital as the maximum loss per trade (e.g., 1–2%)
- Wave counts with tight, well-defined stop-loss levels allow for larger position sizes at controlled risk
