Module 6 · Risk management and psychology
Risk and position size
How much you're willing to lose on one trade, how many shares that means, and which account-level limits you need — with formulas and worked examples.
11 min
The most important question
Beginners ask "how much can I make?" Experienced traders ask "how much do I lose if I'm wrong?" The secret to staying in the market is keeping losses small and known in advance. Even the best analysis is wrong on many trades; what keeps you in the game is position size.
In this lesson we work on three levels: one trade (how much risk), one position (how many shares) and the whole account (how much risk is open in total).
Risk per trade
is the amount you lose if the stop is hit, as a % of your account. A common rule: never risk more than 1% (at most 2%) of the account on a single trade. For a beginner, 0.5% is an excellent choice too.
Why such a small percentage
Ten losses in a row happen to every trader. Even a system with a 50% win rate will produce such streaks over a long run.
At 1% about 90% of the account remains. At 10% about 35% remains and you need ~187% to recover.
- At 1% risk: 0.99¹⁰ ≈ 0.90 — the account drops ~10%. Easy to recover.
- At 10% risk: 0.9¹⁰ ≈ 0.35 — the account drops ~65%. Recovery needs ~187%.
That is maths: the deeper the loss, the disproportionately harder the way back. Getting out of −10% takes +11%, −20% takes +25%, −30% takes +43%, and −50% takes +100%.
The same trades, different risk
The risk level does not change the quality of a system — only how deep its swings are.
Account $10,000, same results: 9 wins (+2R), 11 losses (−1R), +7R in total. At 1% risk the low point is $9,507 (−4.9%), at 2% $9,029 (−9.7%), at 5% $7,682 (−23.2%). Final: +7%, +14%, +34.1%. That deepest point is exactly where many people abandon a system.
All three lines contain the same trades: of 20 trades, 9 are +2R and 11 are −1R, +7R in total. Account $10,000:
- 1% risk: low point $9,507 (−4.9%), ends at $10,700.
- 2% risk: low point $9,029 (−9.7%), ends at $11,397.
- 5% risk: low point $7,682 (−23.2%), ends at $13,412.
The 5% curve ends higher — but only in this order. If 8–10 losses came at the start, 5% risk would cut the account in half. On top of that, at −23% most people lose faith and abandon the system at the worst possible moment. Small risk protects not only your money but your psychology.
The position size formula
is how many shares to buy:
Shares = (account × risk %) ÷ (entry price − stop price)
The order matters:
- First you put the at a technical place — below the level that proves the idea wrong.
- Then you calculate the risk per share: entry − stop.
- Finally you fit the size to that distance.
Never the other way round: "I'll buy 100 shares and put the stop $1 lower to match" means your wallet, not the market, sets the stop.
Example 1: the basics
- account $5,000, risk 1% → $50;
- entry $20, stop $19 → $1 risk per share;
- shares = $50 ÷ $1 = 50 shares (position value $1,000).
The rest of the lesson — with a free account
Sign up to read the lesson to the end: a 7-question quiz, a practical task, and your progress is saved.
Later in this lesson
- Account-level limits
- Halal limits
- Common mistakes
- Checklist
- A 7-question quiz (60% to pass)
- Practical task: Size a trade with three stops