Risk Management for Traders — Position Sizing
Risk management is not the exciting part of trading. Nobody posts screenshots of their position sizing calculator on social media. But it is the single thing that determines whether you are still trading in 12 months or you have blown your account and given up.
The 1% Rule
Never risk more than 1% of your total account on a single trade. This is not a suggestion — this is a survival rule. Here is why:
Account: £5,000
1% risk per trade = £50 max loss
10 consecutive losses = £500 (10% drawdown)
Still have £4,500 to work with
Compare: 10% risk per trade
10 consecutive losses = account wiped
Ten consecutive losses sounds extreme, but it happens. Even a strategy with a 60% win rate will hit 10 losers in a row eventually over thousands of trades. The 1% rule ensures you survive the inevitable losing streak.
Position Sizing — The Actual Maths
Position sizing answers the question: "How many shares/lots/contracts should I buy?" The formula is simple:
Position Size Formula
Position Size = Account Risk / Trade Risk
Account Risk = Account Balance x Risk % (e.g. 1%)
Trade Risk = Entry Price - Stop Loss Price
Worked Example
Account: £10,000
Risk: 1% = £100
Stock: Barclays at 200p
Stop loss: 190p (10p away)
Position size = £100 / £0.10 = 1,000 shares
Cost = 1,000 x £2.00 = £2,000
If stopped out: lose exactly £100 (1% of account)
Stop Losses — Non-Negotiable
Every trade needs a stop loss. Set it before you enter. Put it where your trade idea is invalidated — not at a random round number or at a distance you "feel comfortable with."
- •Technical stop — below the recent swing low for a long trade, or above the recent swing high for a short. If price breaks that level, your analysis was wrong.
- •ATR-based stop — use the Average True Range to set your stop 1.5-2x ATR away from entry. This accounts for normal market noise.
- •Percentage stop — simple but crude. "I will exit if the trade goes 2% against me." Works for beginners but is not as precise.
Never Do This
Never move your stop loss further away from your entry. If you are tempted to, it means you are hoping instead of trading. Hope is not a strategy. Take the loss, review the trade, and move on.
Risk-Reward Ratio
For every trade, your potential profit should be at least twice your potential loss. This is a minimum 1:2 risk-reward ratio. Here is why it matters:
1:2 risk-reward with 40% win rate:
100 trades: 40 wins x £200 = £8,000
60 losses x £100 = £6,000
Net profit: £2,000
You are profitable even though you lose more often than you win.
This is the magic of risk management. You do not need to be right most of the time. You need your winners to be significantly larger than your losers. Let that sink in — it changes how you think about trading.
Maximum Daily and Weekly Drawdown
Set hard limits beyond individual trades:
- •Daily max loss: 2-3% — if you lose 2-3% of your account in a day, you are done for the day. Close the platform.
- •Weekly max loss: 5-6% — if you hit this, take the rest of the week off. Review your journal. Something is off.
- •Monthly max loss: 10% — if you draw down 10% in a month, switch to paper trading. Rebuild confidence before risking real money again.
Correlation Risk — The Hidden Danger
Having five open trades that all move in the same direction is not diversification — it is one big trade wearing a disguise. If you are long GBPUSD, long EURUSD, and long AUDUSD, you are essentially just short the US dollar three times.
Practical Rule
Treat correlated positions as a single trade for risk purposes. If you have three correlated positions each risking 1%, your real risk is closer to 3%. Adjust accordingly.
Risk Warning
Trading financial instruments carries a high level of risk. You could lose some or all of your invested capital. Past performance does not guarantee future results. This content is for educational purposes only and does not constitute financial advice.