Trading basics — risk, position sizing & R:R
The difference between traders who survive and those who don’t isn’t entry quality — it’s position sizing and risk-per-trade. This guide walks through both with worked examples.
1. Risk per trade
Most professional traders cap risk at 0.5–2 % of account equity per trade. With 1 % risk and a 50 % win-rate, you can have 10 losers in a row and still be down only ~10 % — survivable. With 10 % risk per trade, the same streak wipes you out.
2. Position sizing — the formula
Position size = (Account equity × Risk %) ÷ (Entry − Stop)
Example: $10,000 account, 1 % risk = $100 max loss. Entry $50, stop $48 (so $2 risk per share). Position size = $100 ÷ $2 = 50 shares. The price gap from entry to stop is the only thing that determines size — not how confident you feel.
Use the Position size calculator to skip the maths.
3. R-multiples (R:R)
“R” is the dollar amount you’re risking on a trade. A trade that targets +3 R is risking $1 to make $3. Track every trade in R, not dollars — it makes performance comparable across position sizes and timeframes. Aim for an average winner ≥ 1.5 R if your win-rate is around 50 %.
4. Stop placement
Stops belong where the trade idea is invalidated, not at a fixed dollar amount below entry. If a level is “the line that says I was wrong,” your stop goes just beyond it. Then you size the position around that distance — never the other way around.
5. Win-rate vs R-multiple
You don’t need to be right most of the time. A 40 % win-rate with 2 R winners is profitable. A 70 % win-rate with 0.5 R winners and 1 R losers is not. Optimise for expectancy: (Win % × avg R win) − (Loss % × avg R loss).