Risk per trade: how to size a position

A simple formula that answers "how much should I buy".

Steps

1. Decide how much money you are willing to lose in the trade. Many use 0.5–2% of the account. That is a guide, not a rule.

2. Find the stop price: where the idea is invalidated.

3. Measure the distance from entry to stop.

4. Position size = money at risk / distance to the stop.

Example

Account $1000, risk 1% = $10. Entry 100, stop 98: distance 2. Position size 10 / 2 = 5 units. If the stop hits you lose about $10. Fees and slippage add a little on top.

Why it matters

After a losing streak a small risk keeps you in the game. Five losses of 1% cut the account by about 5%, while five losses of 10% cut it by about 41%. That is why sizing matters more than a pretty entry.

Related terms