From the book Hedge
Fund Market Wizards (largely different from how most value investors
operate, but interesting nonetheless):
“First, you decide where you are wrong. That determines
where the stop level should be. Then you work out how much you are willing to
lose on the idea. Last, you divide the amount you’re willing to lose by the
per-contract loss to the stop point, and that determines your position size. The
most common error I see is that people do it backwards. They start with
position size. Then they know their pain threshold, and that determines where
they place their stop.”