Risk per trade

The only number you choose

Almost nothing in a trade is yours to decide. The entry price is an offer the market makes. The exit price is a vote strangers take later. Whether the idea works at all is, frankly, none of your business — the market will settle that without consulting you.

One number is entirely yours: how much you plan for this idea to cost you if it is wrong — its planned risk. That number is the risk per trade. It is set before the entry, in writing, as a percent of the account and as a dollar figure — and once the trade is on, it does not move. Everything else in this folder is machinery for honoring it.

Notice what risk per trade is not. It is not the size of the position: a $10,000 position can risk $100 or $3,000, depending on where being wrong begins. It is not a prediction about the trade’s chances: a trade you love and a trade you merely like carry the same risk budget. Risk is the price of admission you agree to pay for finding out.

Loss first, entry second

Watch the order in which an amateur and a professional plan the same trade. The amateur starts with the entry, imagines the gain, and lets the loss be whatever it turns out to be — a number discovered later, in the worst possible mood. The professional starts at the other end: what does being wrong cost, exactly, and can the account shrug it off? Only then, the entry.

This is not pessimism; it is sequence. The planned loss is the only part of the trade whose size you control, so it is planned first, while you are calm, the way a building’s exits are drawn before anyone moves in. Planned is the honest word: the budget is chosen, but the realized loss is an estimate that assumes the exit fills at its level — a gap through the level fills worse, and Lesson 20 prices that in. Two quieter uncertainties ride along even on ordinary days: slippage — the small difference between the price you expected and the price the fill actually prints, wider when a stock trades thinly or moves fast — and plain execution uncertainty: an exit can fill late, in pieces, or below the level you planned around. Planned risk is the number you choose; the realized loss is the number the market hands back, and the two are not promised to match. Deciding the loss after the entry is deciding it under fire — and decisions made under fire are how a 1% loss becomes a 9% loss while its owner negotiates.

A fixed fraction, not a feeling

The mechanic is one line: risk per trade = a fixed fraction of the account. The fraction most beginners are taught to start from is 1% — on a $25,000 account, $250 per idea. The percentages in this lesson — 1%, 2%, 5% — are hypothetical teaching inputs, chosen to show the arithmetic; they are not a recommendation for any account. Not because 1% is magic, but because of what it does to the arithmetic of a bad stretch, which is the next section’s whole subject.

Fixed is the load-bearing word. A fraction that rises when you feel confident and falls when you feel scared is not a risk rule; it is a mood with a percent sign. The account cannot tell a confident loss from a careless one — it only subtracts. Your own fraction gets set, in your own numbers, in Lesson 22’s risk plan. This lesson’s job is the shape: small, fixed, and in writing.

Ten losses in a row

Losing streaks are not misfortune; they are arithmetic on a schedule. A trader who is right half the time — a perfectly respectable record — will still, given enough trades, lose ten in a row. The assumptions inside that sentence: each trade is independent of the last, the chance of losing any one trade stays at one in two, and the run of trades is long. Starting at any single point, ten straight losses at even odds is roughly a one-in-a-thousand run — one-half multiplied by itself ten times — rare in any given week, and close to certain somewhere across a long career. That is why the fraction matters more than the forecast. The only question the streak asks is what fraction each loss took. Run the streak at three fractions of the same $25,000 account and the lesson is the table in the worked example below: at 1%, the streak costs about a tenth of the account and the trader is annoyed. At 5%, it costs two-fifths, and the trader is a different person — chasing, oversizing, trying to win it back. The streak did not change. The fraction did.

That is the entire argument for small, fixed risk: not that losses are unlikely, but that they are certain — and survivable at the right size. A risk you can take ten of in a row without changing your behavior is a risk that fits. Anything larger is a countdown.

Practice

Work this fictional example on paper. The account is a hypothetical $25,000 and the planned risk is the lesson’s teaching input of 1%. (1) What is the planned risk in dollars? (2) The trade’s exit gaps through its level and the realized loss is $310. What percent of the account is that, and in one sentence, why does it differ from the plan? (3) Three planned losses in a row, each charged on the shrinking balance: what is the account after the third?

Work it through: (1) 1% of $25,000 = $250. (2) $310 ÷ $25,000 = 1.24%. Planned risk is a budget set before the entry; the realized loss is whatever the actual fill delivers, and a gap through the level fills worse than the level. (3) $25,000 × 0.99 × 0.99 × 0.99 = about $24,257 — each loss is charged on what the previous loss left behind.