Risk per trade: how position size decides whether your account survives long enough for you to be right

Risk per trade is a share of the account, set in advance, that you agree to lose if the idea does not work out. It is calculated not from the size of the position or the amount you spend on the purchase, but from the distance between the entry price and the level at which you admit the idea was wrong. First you choose the share of capital you are prepared to risk, then you set the stop-loss level according to the logic of the trade, and only from these two quantities do you arrive at the number of securities. The position is the result of a calculation, not a starting wish.

What counts as risk and what does not

In this calculation, risk means only the potential loss down to the stop. The value of the position is beside the point: buying a liquid security with a tight stop can carry less risk than a position four times smaller in money terms in an instrument with a wide stop. Exact multipliers cannot be given here, but that is the relationship. It leads to a counter-intuitive conclusion: the question "how much should I buy" is meaningless until you have answered "where will I get out".

The order of the calculation is easiest to keep as a sequence.

• Step one: the share of the account you are risking. It is set once and does not change with your mood or with your confidence in a particular idea.
• Step two: that share converted into money at the current size of the account.
• Step three: the distance from entry to stop in money per security or per lot.
• Step four: the money at risk is divided by the distance to the stop. The result is the number of securities that goes into the order.

If the resulting quantity comes out fractional or below one lot, the idea cannot be scaled to your account in this instrument — and that is an answer, not an obstacle.

Why a share of capital rather than a fixed amount

A fixed share automatically shrinks the risk as the account falls and expands it as the account grows. A fixed amount behaves the opposite way: during a drawdown it takes up an ever larger part of the remaining capital, and by the time the losing streak ends there is nothing left to risk. This is mechanics, not caution: when you lose, the arithmetic of the account works against you, because any recovery is measured from a smaller base.

A losing streak is normal, not a system failure

A strategy with a stable positive expectancy still produces runs of consecutive losses, and the length of such a run grows with the number of trades. Correctly set risk per trade is the answer to the question of whether the account will survive the streak you have decided in advance is acceptable. Incorrectly set, it turns an ordinary statistical streak into the end of your trading. That is why the share is chosen not from the expected return but from the length of drawdown you can go through without changing your behaviour.

Liquidity: a hidden add-on to risk

The calculation assumes that you will be let out at the stop price. In a security with thin demand, your own exit moves the price, and the stated risk turns out to be understated. The practical conclusion is simple: the lower the liquidity, the more conservative the share should be and the wider the stop has to be on the merits of the trade — and therefore the smaller the position. Instruments can be compared by turnover and composition in the Russian equities section; for the fixed-income side the same consideration applies in the bonds section, although in OFZ liquidity and the reasons for price moves are fundamentally different.

Risk per trade and portfolio risk are not the same thing

Several positions, each carefully sized on its own, can add up to one large risk if they move together. Stocks from the same sector, tied to the same commodity or the same exchange rate, hit their stops simultaneously on a bad day, and the portfolio takes a combined loss. That is why a second limit is added to risk per trade — the total risk of all positions open at the same time — and a third one, for groups of correlated ideas.

Where the framework usually breaks down

• Moving the stop "just a little further" when the price approaches the level. The risk stops being defined and becomes unknown.
• Averaging down a losing position without recalculating: the share of the account at risk grows silently.
• Increasing size after losses in order to "win it back". This changes not the expectancy but the speed of ruin.
• A stop placed according to the amount of loss you can tolerate rather than the level at which the idea is disproved. Such a stop is triggered by ordinary noise.

What is not covered here

The share of risk that is right for you cannot be taken from a general article: it depends on the size of the account, your horizon, the share of trading capital in your overall money and the drawdown you can tolerate. This figure is not calculated from the site's database — you set it yourself and check it against your trading journal. Definitions of the terms used in the calculation are collected in the glossary.