Risk per trade and how to calculate it
Understanding Risk per Trade
Risk per trade refers to the maximum amount of capital you're willing to lose on a single trade, expressed as either a dollar amount or percentage of your total account.
The 1% Rule
- Standard practice: Risk only 1-2% of total capital per trade
- $10,000 account = $100-$200 risk per trade
- Protects against string of losses
Simple Calculation Method
Formula
Position Size = (Account Risk) / (Entry Price - Stop Loss Price)
Example
- Account: $20,000
- Risk per trade (1%): $200
- Stock price: $50
- Stop loss: $45
- Calculation: $200 / ($50 - $45) = 40 shares
Key Components
| Component | Description |
|---|---|
| Account Size | Total trading capital |
| Risk Percentage | 1-2% recommended |
| Entry Price | Purchase price |
| Stop Loss | Exit price if trade moves against you |
Practical Tips
- Always set stop losses before entering trades
- Adjust position size when volatility increases
- Reduce risk percentage during uncertain markets
- Use trading calculators to automate the math
Common Mistakes
- Risking more than 2% per trade
- Moving stop losses further away
- Not accounting for trading fees
- Ignoring overnight/weekend risk
Proper risk calculation protects your capital and keeps you in the game. By consistently applying the 1% rule and precise position sizing, you ensure no single trade can significantly damage your account.