Risk per trade
In Lesson 1 you saw that accounts end when losses outrun the account. The first defense is simple: decide how much you are willing to lose on a trade before you take it. That number is your risk per trade.
What risk per trade means
Risk per trade is the amount of money you expect to lose if the trade is wrong and your stop is hit. It is set in advance, in dollars, and it does not change because you feel confident about a trade.
It is not the margin you post, and it is not the full value of the contract. It is the distance from your entry to your stop, turned into dollars, times the number of contracts. (Lessons 3 and 4 show exactly how.)
Method 1: a fixed dollar amount
The simplest approach is to pick one dollar figure and use it on every trade.
Example (made-up numbers, not a recommendation): you decide to risk $50 per trade.
- Account $5,000: risk $50.
- Account drops to $4,000: still risk $50.
- Account grows to $6,000: still risk $50.
Strengths: easy to remember, easy to check, and every trade is the same size in dollars, so your results are easy to compare.
Weakness: it does not adjust. If the account shrinks, $50 becomes a bigger slice of what is left. At $5,000, $50 is 1 percent. At $2,500, the same $50 is 2 percent.
Method 2: a percentage of the account
The other approach is to risk a fixed percentage of your current balance.
The math: risk in dollars = account balance times the percentage.
Example (made-up numbers, not a recommendation): you choose 1 percent.
- Account $5,000: 5,000 times 0.01 = $50.
- Account drops to $4,000: 4,000 times 0.01 = $40.
- Account grows to $6,000: 6,000 times 0.01 = $60.
Strength: risk shrinks automatically when you are losing and grows slowly when you are winning. A losing streak takes smaller and smaller bites.
Weakness: with small accounts and micro contracts, the dollar amount can get too small to fit even one contract for some stop sizes. (Lesson 4 covers what to do when the math says zero contracts.)
Watching a losing streak
Here is the same five-loss streak under each method, starting at $5,000 (made-up numbers). Each line is the balance after that loss.
| After loss | Fixed $50 | 1 percent of balance |
|---|---|---|
| Start | $5,000.00 | $5,000.00 |
| 1 | $4,950.00 | $4,950.00 (lost $50.00) |
| 2 | $4,900.00 | $4,900.50 (lost $49.50) |
| 3 | $4,850.00 | $4,851.50 (lost $49.01, rounded) |
| 4 | $4,800.00 | $4,802.98 (lost $48.52, rounded) |
| 5 | $4,750.00 | $4,754.95 (lost $48.03, rounded) |
How the percentage column works: each balance is the one above times 0.99. After five losses that is 5,000 times 0.99 times 0.99 times 0.99 times 0.99 times 0.99, which is about $4,754.95.
With small risk, the two methods barely differ over five trades. The difference matters over long streaks and with larger percentages. The real lesson is the same either way: both keep a normal losing streak from becoming a disaster, because each loss is small compared with the account.
Choosing your number
This course will not tell you what your number should be. That depends on your money, your goals, and your situation, and it is your decision. A few principles to think through:
- Only risk capital. The NFA advises trading futures only with money you can afford to lose.
- Small enough to survive a streak. Ask: “If I lose ten trades in a row, where is my account?” If the answer scares you, the number is too big.
- Written down. A number in your head moves when you are excited or upset. A number on paper does not. (Lesson 14 puts it in your risk plan.)
Planned risk is not a guarantee
Your risk per trade assumes your stop fills at your stop price. It may not. FINRA explains that a stop order turns into a market order once its price is reached, and in a fast market the fill can be well away from the stop price. And the CFTC’s risk disclosure reminds every futures customer that losses can go beyond the money deposited. Plan your risk, then remember that the real loss can be larger.
Key ideas
- Risk per trade is the money you plan to lose if the stop is hit, set before you enter.
- Fixed dollar: the same amount every trade. Simple, but it becomes a bigger share of a shrinking account.
- Percentage: balance times a percentage. Risk shrinks as the account shrinks.
- Pick a number you could lose many times in a row and still trade, and write it down.
- Planned risk is not guaranteed: stops can fill worse in fast markets.