Unit risk is the planned loss on a single unit of a position when price moves from entry to the invalidation level. It is calculated as the invalidation distance multiplied by the money value of one price unit for that product.
How it works
For a product where one contract represents 100 units, a $1 price move changes one contract by $100. A $2.50 invalidation distance therefore means $250 of unit risk.
Unit risk is the denominator in the sizing formula: position quantity = risk budget ÷ unit risk.
Why it matters
Unit risk keeps the invalidation decision separate from the sizing decision. You set where the idea is wrong first, then measure how much that distance costs per unit.
Different products can track the same market with very different unit risk, so the product name alone does not tell you the risk.
A simple market example
Entering around $50 with invalidation at $47.50 gives a $2.50 distance. If one unit of the product changes by $100 per dollar of price, unit risk is $250.
Common mistakes
Measuring unit risk with a stop that was chosen to fit a desired size, which reverses the process.
Ignoring how large one contract actually is, so the unit-risk number is wrong even when the formula is right.
Frequently asked questions
Is unit risk the same as the stop distance?
Not exactly. The stop distance is the price gap; unit risk converts that gap into a cash amount for one unit of the product.
Why does unit risk vary between products?
Because contracts bundle different quantities. One contract may represent 100 units while another represents 1,000.
How do I reduce unit risk?
Use a product with a smaller unit, tighten the invalidation distance, or accept a smaller position. Tightening invalidation to fit more size reverses the logic.
Educational content only. Definitions describe common market usage and may vary by jurisdiction, instrument, or institution.