This study examined whether life stress was associated with elevated sexual risk among young transgender women and whether this relationship was mediated by alcohol and substance use. The analysis was based on data collected from 116 transgender women aged 16 to 25 as part of a baseline assessment for an HIV prevention intervention. The median age was 20; the majority identified as African American (48%) or Hispanic (32%). Controlling for age, high life stress was associated with an increased odds of sexual risk (OR = 2.39; 95% CI 1.12-5.12). This association was attenuated when substance and alcohol use were added to the model (OR = 1.82; 0.80-4.13). A formal test of the mediation hypothesis indicated a statistically significant indirect effect (β = 0.08; 95% CI 0.02-0.20). Interventions aimed at reducing sexual risk behavior should address problems with substance use as well as more distal factors that impact risk, such homelessness, joblessness, and lack of access to medical care.