Risk first, profit second
Professional traders do not decide how much to buy; they decide how much to lose. Risk a fixed fraction of your account per trade — one percent is the standard, two percent is aggressive — and let the distance to your stop determine the position size, not the other way round.
The formula: position size equals account risk divided by the distance from entry to stop. With a 10,000 account, one percent risk and a 5 percent stop distance, your position is 2,000. Change the stop and the size changes with it.
Think in R
Express every outcome as a multiple of the amount risked. A trade that made three times your risk is +3R; a stop-out is −1R. This normalises results across instruments and account sizes and makes performance measurable. Your goal is a positive average R over a large sample, not a high win rate.
Expectancy equals win rate times average win minus loss rate times average loss. A system that wins 40 percent of the time at +3R is dramatically better than one that wins 80 percent at +0.3R.
The brutal math of drawdown
Losses compound against you. A 20 percent drawdown needs 25 percent to recover, a 50 percent drawdown needs 100 percent, and a 90 percent drawdown needs 900 percent. Capital preservation is not caution, it is arithmetic.
Hard rules that save careers
Write these down and treat them as non-negotiable.
- Maximum risk per trade: one percent of equity.
- Maximum daily loss: three percent, then stop trading for the day.
- Maximum simultaneous correlated positions: two.
- No moving a stop further away, ever. Only towards profit.
- No adding to a losing position.
- No revenge trade after a stop-out; wait for the next planned setup.