Risk and Position Sizing: Protect Your Capital While You Learn
By Doji Works
Once you know what you can trade and how (swing, day, or scalp), the next step is learning how much to risk per trade. Good risk management won't make every trade a winner, but it keeps you in the game long enough to improve.
Why risk management matters
Markets are uncertain. Even the best setups lose sometimes. If you risk too much per trade, a normal run of losers can wipe out your account or your confidence. Risk management is about limiting how much you can lose on a single trade or over a bad patch, so you can survive, learn, and keep trading.
What is position sizing?
Position sizing means deciding how many units (shares, lots, or contracts) you trade so that if the stop loss is hit, you lose only a set amount -usually a small percentage of your account. For example, if you risk 1% per trade and your account is £10,000, you allow a loss of £100 per trade. You then choose position size so that the distance from entry to stop (in money terms) equals that £100.
A simple rule: risk a small % per trade
A common starting point is 0.5% to 1% of your account per trade. So on a £10,000 account, that's £50–£100 max loss per trade. If you're new, lean toward 0.5%. This keeps drawdowns manageable and lets you take many trades without blowing up.
Use a stop loss before you enter
Decide where you're wrong before you enter. That level becomes your stop loss. Once you have entry and stop, you know the risk per unit (e.g. per share). Then:
Position size = (Risk in money) ÷ (Risk per unit)
Example: you risk £100, and each share risks £0.50 from entry to stop. Position size = 100 ÷ 0.50 = 200 shares.
Don't move your stop against yourself
Moving your stop further away to "give the trade room" just increases your risk. If the market hits your original stop, the thesis often failed. Stick to the plan; take the loss and look for the next setup.
One more habit: max risk per day or week
Besides per-trade risk, many traders cap total risk per day or week (e.g. stop after losing 2% in a day). That prevents a bad day from turning into a bad month.
- Risk and position sizing are boring compared to picking entries, but they're what separate traders who last from those who blow up. Start with a fixed % per trade and a strict stop; you can refine the rest as you go.