Risk per Trade

Why one percent

A strategy with a 50 percent win rate will produce a streak of seven consecutive losses roughly once every 128 sequences of seven trades, which is to say regularly. At 1 percent a seven-loss streak costs about 6.8 percent of the account. At 5 percent it costs 30 percent, and the trader is then trying to make 43 percent just to get back to even. The percentage is chosen so that bad luck of the ordinary kind cannot end the account.

Percent versus fixed amount

Risking a fixed percentage means the amount risked falls as the account falls and rises as it grows, which slows losses and compounds gains. Risking a fixed dollar amount is simpler but means a shrinking account risks a growing share. Percent of current equity is the standard, recalculated for each trade.

Adjusting

• Lower the risk for trades with less conviction or in unfamiliar markets, not higher for trades you feel sure about.
• Lower it during a drawdown; some traders halve risk after a set loss and restore it after recovery.
• Lower it around news and in thin markets to allow for slippage.
• Raise it only after a long record on the demo and live shows the strategy's edge and variance.

Daily and weekly limits

Risk per trade caps a single loss. A daily limit, perhaps 3 percent, caps a bad day, and a weekly limit caps a bad week. They stop the sequence in which a trader loses twice, doubles up to recover, and loses the week in an afternoon. Prop firms impose them; self-funded traders should too.

Key takeaways

• One percent is the standard; two percent is the ceiling; five percent is gambling.
• Percent of current equity, recalculated each trade.
• Adjust downwards for uncertainty and drawdown, never upwards for confidence.
• Add daily and weekly limits.