By The 888 VaultPublished Updated 10 min read
Almost everybody learning to trade spends their first year on entries. Entries are the most visible part and the least important one. The number that decides whether you are still doing this in a year is how much you put at risk on each idea.
Pick a fixed percentage, size every position from it, and never change it because a setup feels better than usual. The feeling is not information; the sizing is the only thing you control completely.
Start with the uncomfortable numbers
Anybody selling trading education has a reason not to lead with this, which is exactly why it belongs at the top.
In several jurisdictions, firms offering leveraged retail products are required to publish the proportion of their retail client accounts that lose money, and to display it prominently. The figures are consistently high, they are published by the firms themselves rather than by critics, and the regulators' own material on the risks of these products is public and worth reading before you trade anything with leverage on it.Sources for this passage: Financial Conduct AuthorityEuropean Securities and Markets Authority
The honest reading of that is not "do not trade". It is that the base rate is against you, that most of the people who fail do so for reasons that are structural rather than clever, and that the single largest structural reason is position sizing.
What risk per trade actually means
It is the amount you lose if the trade is wrong, expressed as a percentage of your account. Not the size of the position, not the margin used, and not how confident you feel — the loss if the invalidation is hit.
That means it is calculated backwards from the stop, not forwards from the position. You decide where the idea is wrong, you decide what percentage you are prepared to lose, and the size falls out of the arithmetic. Doing it the other way round — choosing a size and then finding somewhere to put a stop — is the most common error in retail trading and it is invisible from the outside.
The formula is unglamorous: position size equals the amount you are risking divided by the distance to the invalidation. Everything else in this article is a consequence of taking that seriously.
- Decide where the idea is wrong, first
- Decide the percentage you will lose if it is, second
- Let the position size be the output, never the input
The arithmetic of a losing run
Losing runs are not a possibility to plan around; they are a certainty to size for. Any method with a win rate below 100% produces runs of losses, and the length of the runs is longer than intuition suggests.
The part that catches people is that recovery is not symmetrical. Lose 10% of an account and you need 11.1% to get back. Lose 50% and you need 100%. Lose 80% and you need 400%. The deeper the hole, the more the arithmetic works against you, which is why avoiding the deep hole matters more than any improvement in win rate.
Run the same numbers on a 1% risk and a 5% risk over an identical run of eight losses. At 1% you are down about 8% and still trading the same way. At 5% you are down about 34%, you need to make more than half your remaining account back to break even, and — far more damaging — you are now making decisions from a position of needing to recover.
That last effect is why the sizing question is also the psychology question. Almost everything people describe as a discipline problem is a position that was too large to think clearly about.
Why leverage does not change the idea
Leverage changes the size of the mistake, not the quality of the analysis. A setup that is right is right at any size; a setup that is wrong costs you more with leverage and nothing else about it has changed.
Used properly it is a tool for accessing a market with less capital tied up, and the risk per trade stays exactly where you set it. Used improperly it becomes a way of taking a larger position than your account justifies while telling yourself the risk is the same because the stop is in the same place.
The test is simple: if increasing leverage increases the amount you would lose when the invalidation is hit, you have not used leverage — you have increased your risk. If it does not, the leverage was a capital-efficiency decision and is uninteresting.
Picking your number
There is no universally correct percentage, and anybody quoting one as though there were is not thinking about your circumstances. What is universal is the discipline of picking one and not moving it.
The considerations are how many positions you hold at once, how correlated they are, how long a losing run your method could plausibly produce, and — the one people ignore — the size of the account relative to what it would mean to lose it. A number that is arithmetically fine and emotionally unbearable is the wrong number, because you will abandon it under pressure.
Once chosen, the rule is that it does not change because a setup looks better than usual. Every trader believes their current idea is above average; that belief is uncorrelated with the outcome, and sizing up on it is how a good month becomes a bad quarter.
How to know you are actually doing it
Write the intended risk down before the entry, in the journal, next to the invalidation. Then check it against what you actually risked. The gap between the two is the most honest metric in trading and almost nobody measures it.
Review a month of that gap rather than a month of profit and loss. Profit and loss over a month is mostly noise; whether you sized what you said you would size is entirely within your control and is the thing that improves.
The article on what a trading journal has to contain sets out the fields that make this review possible. If your journal only records entries and exits, you can see what happened but not whether you did what you intended, which is the only question worth asking.