Money Management Trading
Risk Per Trade and Position Sizing
When it comes to protecting your trading account, knowing how much to risk per trade and how to size your positions is your first line of defense. Let’s break it down into simple, actionable steps.
How Much Should You Risk Per Trade?
A good rule of thumb for most retail traders is to risk between 0.5% and 1% of your account on each trade. Here’s why:
If you have a $10,000 account, risking 1% means you’re risking $100 per trade.
Smaller risk per trade helps you avoid big losses and keeps your emotions in check.
If your win rate is below 50%, lean towards 0.5% or less to survive losing streaks.
If you have a higher win rate and a solid risk-reward ratio (like 2:1), you can cautiously bump it up to 1% or a bit more.
Avoid risking 2% or more unless you have a proven system and strong emotional control.
The key is to pick a risk level that lets you stay in the game long enough for your edge to work.
Tip: Many successful traders swear by risking no more than 1% per trade. This keeps drawdowns manageable and your mindset steady.
Step-by-Step Position Sizing
Position sizing is how you translate your risk percentage into the number of shares, lots, or contracts to buy or sell. Here’s a simple checklist you can follow for stocks, forex, crypto, and futures:
Step | What to Do | Example (Stocks) |
|---|---|---|
1 | Decide your risk per trade (e.g., 1%) | $10,000 account → 1% risk = $100 |
2 | Find your stop loss distance in price terms | Buy at $50, stop at $48 → stop distance = $2 |
3 | Calculate position size: Risk Amount ÷ Stop Distance | $100 ÷ $2 = 50 shares |
For Forex and Crypto:
Convert your stop loss into pips or points.
Calculate pip/point value per unit.
Use the same formula: Risk Amount ÷ Stop Distance (in pips/points).
For Futures:
Know the contract size and tick value.
Calculate how much each tick move costs.
Position size = Risk Amount ÷ (Tick Value × Number of Ticks to Stop Loss).
This method ensures you never risk more than your set percentage, no matter the market.
By sticking to these simple rules, you’ll protect your account from big hits and build confidence in your trading. Remember, controlling risk is your best trade.
Stops, Targets, and Managing the Trade
Where to Place Your Stop and Take-Profit
Getting your stop loss and take-profit right is key to protecting your account and letting winners run. Here’s a simple way to think about it:
Stop Loss: Put it just beyond a logical level that proves your trade idea wrong. This could be just past recent support or resistance, or a technical level like a moving average or swing low/high.
Avoid: Stops that are too tight (you’ll get stopped out on normal market noise) or too wide (you risk too much).
Take Profit: Aim for at least twice the distance of your stop loss to keep a 2:1 risk-reward ratio. For example, if your stop is 1 point away, set your target 2 points away.
But don’t force a 2:1 if the market structure doesn’t support it. Sometimes 1.5:1 or 3:1 makes more sense. The goal is to balance a good reward with a stop that respects market noise and your trade idea.
When to Move to Breakeven and Trail Your Stop
Locking in profits without choking your trade is a skill you can master with simple rules:
Move to Breakeven: Once your trade moves in your favor by the amount you risked. For example, if you risked $100, move your stop to your entry price when you’re up $100.
Start Trailing: When your trade gains 2 to 3 times your initial risk, begin trailing your stop. Use technical levels or a fixed distance to follow the price logically.
Quick Rules to Avoid Giving Back Big Gains
Don’t move stops to breakeven too early—wait for a meaningful move.
Trail stops below higher lows in an uptrend or above lower highs in a downtrend.
Avoid manual tinkering unless you have a clear reason.
Tip: A simple way to trail stops is to use the Average True Range (ATR). For example, trail your stop 1.5 ATR below the current price in an uptrend. This adapts to market volatility and keeps you in the trade longer.
By following these rules, you protect your capital and let your winners grow without stress or guesswork.
Surviving Drawdowns and Scaling Up Safely
Drawdowns are part of trading, but how you handle them makes all the difference. Here’s a straightforward way to set rules that protect your account and keep your confidence intact.
Set Clear Max Drawdown Limits
Think of max drawdown limits as your safety net. They stop you from digging a hole too deep.
Daily max drawdown: 1-2% of your account
Weekly max drawdown: 3-5%
Overall max drawdown: 10-15% before you seriously reassess your strategy
If you hit your daily or weekly max, stop trading immediately. This pause prevents emotional, revenge trades that can wreck your account. If losses keep piling up or you’re close to your max drawdown, cut your position size to protect your capital and your mindset.
Understand Risk of Ruin in Simple Terms
Risk of ruin means losing so much you can’t bounce back. You want to keep this risk near zero.
Here’s how:
Risk only about 1% or less per trade
Have a positive edge: your win rate and risk-reward ratio (R:R) should work in your favor
Use stops and manage position size to avoid big losses
For example, even if you win only 40% of your trades, having a 2:1 risk-reward ratio means your winners are twice as big as your losers. This setup, combined with small risk per trade, keeps your risk of ruin very low.
Use simple online calculators or spreadsheets to plug in your numbers and see your risk of ruin. Adjust your risk per trade if it’s too high.
When and How to Scale Up Safely
Scaling up is exciting but do it carefully:
Only increase size after several weeks or months of consistent profits
Increase position size gradually—think 10-20% increments, never double your size at once
Keep your risk per trade consistent relative to your current account size
You can choose to compound profits by reinvesting gains, which speeds growth but ups your risk. To balance this, withdraw some profits regularly. This locks in gains and lowers emotional pressure.
By sticking to these simple, practical rules, you’ll protect your account and build steady growth. Remember, trading is a marathon, not a sprint—stay disciplined and patient, and you’ll get there