Risk per trade for swing trades
Lesson 21 · about 9 min
The risk management course covers fixed-fractional sizing in full; this lesson applies it to the specific shape of swing trading, where positions are held overnight, several are open at once, and the biggest loss of the year is almost never the planned one. The numbers here are the ones the rest of this module builds on, so write them down.
The base number
Risk per trade is a fixed percentage of the current account, applied to the distance between entry and stop.
dollars at risk = account × risk % shares = dollars at risk ÷ (entry − stop)
For swing trading, the recommended base risk is 0.5% to 1.0% of the account per trade. Lower than that and the account cannot grow at a rate that justifies the work. Higher and a normal losing streak, which Module 1 established is six or more in a row at least once a year, becomes a drawdown that damages judgment.
| Base risk | Six straight losses | Ten straight losses | Comment |
|---|---|---|---|
| 0.5% | −3.0% | −4.9% | Comfortable; suits first year |
| 1.0% | −5.9% | −9.6% | Standard once the method is proven |
| 2.0% | −11.4% | −18.3% | Aggressive; requires a strong record |
| 3.0% | −16.7% | −26.3% | Drawdown will change your behaviour |
The losses compound geometrically, so the ten-loss figure is less than ten times the single risk, but the emotional damage does not follow that curve. Most traders begin to make sizing errors somewhere around a 10% drawdown, which is why the playbook caps base risk at 1%.
Adjustments the playbook applies
Base risk is a starting point. Three multipliers from earlier modules stack on top of it, and all of them reduce it:
| Multiplier source | Values |
|---|---|
| Regime (Module 2) | Green 1.0x, amber 0.5x, red 0.25x, cash 0x |
| Setup (Module 4) | Core setups 1.0x, gap-and-hold 0.75x, mean reversion 0.5x |
| Volatility (Module 2) | VIX under 22: 1.0x; 22 to 30: already inside the regime score; over 30: cash |
effective risk = base risk × regime multiplier × setup multiplier
An amber-week mean-reversion trade at a 1% base is 1% × 0.5 × 0.5 = 0.25%. That is intentional. The setups and regimes with the lowest reliability get the least capital.
Worked example
Account $25,000, base risk 1%, green regime, pullback setup. Entry $48.00, stop $45.60.
- Dollars at risk: $25,000 × 1% × 1.0 × 1.0 = $250.
- Distance: $2.40.
- Shares: 250 ÷ 2.40 = 104, round down to 104.
- Position value: 104 × $48 = $4,992, which is 20% of the account: right at the cap.
Same trade, amber regime: $125 at risk, 52 shares, $2,496 position.
The position size calculator does this, including the multipliers if you enter the effective percentage.
Key idea: Base risk is 0.5% to 1% of the account. Regime and setup multipliers only ever reduce it. Position size is the arithmetic output of the effective risk and the stop distance.
The position cap, restated
Module 1 introduced the cap: no single position above 20% of the account, and above 10% for anything held through an event or with a history of large gaps. The cap and the risk formula work together:
- Compute the size from the risk formula.
- Compute the size from the cap (cap % × account ÷ price).
- Take the smaller.
In the worked example above, the risk formula gave 104 shares and the 20% cap gave 25,000 × 0.2 ÷ 48 = 104 shares, a coincidence that shows the cap binding exactly when the stop is around 5% away. Tighter stops than that hit the cap first and the trade risks less than the budget. That is fine. Wider stops hit the risk formula first.
Risk on shorts and leveraged instruments
The formula is identical for a short: distance is stop minus entry. For futures, distance is in points and multiplied by the point value; for forex, in pips multiplied by pip value; for crypto perpetuals, in price times contract size. The risk management course has worked examples for each. The swing-specific note is that the overnight gap cap should be applied to notional exposure, not margin. A $100,000 notional futures position on a $25,000 account is 400% of the account, and the cap says no.
Scaling the base over time
Start at 0.5% for the first 30 trades or three months, whichever is longer. Move to 0.75% when the journal shows positive expectancy over that sample and no rule breaks. Move to 1% after another 30 trades of the same. Never move up during a drawdown, and drop back one step after any month that ends below the monthly loss limit (lesson 4).
Try it: Set your base risk in writing. Then compute the effective risk and the resulting share count for the same trade in a green week with a breakout, an amber week with a pullback, and an amber week with a mean reversion. Confirm the position cap does not bind, and if it does, note the smaller size.
Recap
- Base risk is 0.5% to 1% of the account per trade; the playbook caps it at 1%.
- Effective risk = base × regime multiplier × setup multiplier; multipliers only reduce.
- Position size is the smaller of the risk-formula size and the cap size (20%, or 10% through events).
- Apply the cap to notional exposure in leveraged markets.
- Scale base risk up in steps of 0.25% on evidence from 30-trade samples, never during a drawdown.
See it drawn
Original diagrams for the ideas on this page. Illustrative, not real market data.