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Risk per trade

The fixed fraction of your account you are willing to lose if a single trade hits its stop, commonly 0.5% to 2%.

How a position size is worked outAccount size, risk per trade and stop distance feed into one box giving the number of shares.ACCOUNT SIZE$25,000your capitalRISK PER TRADE1%of the accountSTOP DISTANCE$0.50entry to stopPOSITION SIZE500 sharesrisk budget: $25,000 × 1% = $250position size: $250 ÷ $0.50 = 500 shares
Working out a position size. Three numbers decide how big a trade is: the account, the share of it put at risk, and the distance from entry to stop. One percent of $25,000 is a $250 budget, and a $0.50 stop divides into that 500 times.

Risk per trade is the foundation of position-sizing. Small percentages make losing streaks survivable: at 1% risk, ten straight losses cost about 9.6% of the account; at 5% risk they cost 40%.

The percentage should reflect your win-rate, your max-drawdown tolerance, and how correlated your trades are (portfolio-heat).

Example: with a $20,000 account and 1% risk, every trade is planned so that a full stop-out loses $200, whether it is 500 shares of a $10 stock with a $0.40 stop or 20 shares of a $500 stock with a $10 stop.

Related: position-sizing, risk-management, stop-loss, portfolio-heat

Educational only, not advice. Spotted an error? Post in Site Feedback.