Sizing for the gap, not the stop

The previous lesson said size is the only control left after the close. This is what using it looks like, and it is the same division you already know.

Substitute the distance

Ordinary sizing divides the risk budget by the stop distance. Gap-adjusted sizing divides it by the gap distance - the move you might actually suffer, not the one you asked to be stopped out at.

Choosing the gap distance

There is no correct number, because the next gap's size is not knowable. What is available is history: how large have this index's overnight gaps been, and how often.

• A typical gap tells you what most nights look like and is the wrong input, because sizing is about the bad case.
• A large historical gap is a better input, and still only a sample of what has happened rather than a bound on what can.
• Whatever you choose, write it down. A number chosen deliberately can be revisited; one chosen in the moment cannot.

The obvious objection

This makes positions smaller, sometimes much smaller, and a smaller position makes less when the trade works.

That is true and it is the trade being made. The alternative is not a larger position with the same risk - it is a larger position with a risk you have decided not to measure. The arithmetic does not care which you prefer.

The intraday exemption

A position opened and closed inside a session never meets this risk, so sizing it against a gap is over-caution rather than prudence.

Which means the honest rule has two branches: size against the stop for positions that will be closed today, and against the gap for anything held overnight. The same account can run both, and most of the confusion in risk discussions comes from applying one branch's answer to the other's question.