Trading strategy · Foundations
Risk Management & Position Sizing
The strategy behind every strategy. Learn this first.
▶ Watch the free video lesson with TomWhat it is
Before any entry signal matters, you need to know how much you can lose on a trade and how big your position should be. Professional traders survive by risking a small, fixed fraction of their account on each idea and only taking trades where the potential reward is larger than the risk.
How it works
- Decide your risk per trade as a percentage of your account. Most professionals use 0.5% to 2%.
- Find your stop-loss price on the chart first. It goes where your trade idea is proven wrong, not at a random dollar amount.
- Position size = (Account × Risk %) ÷ (Entry − Stop). This turns a chart level into a share count.
- Measure everything in R, where 1R is the amount you risk. A target twice as far as your stop is a +2R trade.
- Only take trades with at least 1.5R to 2R of potential reward, so you can be wrong more often than right and still grow.
The rules
| Entry | Any valid signal from a strategy in this course. |
|---|---|
| Stop loss | Placed where the setup is invalidated. Always set before entering. |
| Take profit | At least 2R away, or a trailing stop for trend trades. |
| Filter | Skip the trade if size would exceed your risk limit. |
Pros
- Keeps you in the game through losing streaks
- Makes results comparable across strategies
- Removes emotional position sizing
Cons
- Feels slow when you are on a winning streak
- Requires discipline to calculate every single time
Common mistakes
- Moving the stop further away once the trade goes against you
- Sizing by "feel" or by a fixed number of shares
- Risking more after a loss to "win it back"
- Ignoring correlated positions that add up to one big bet
Lesson transcript
Hi, I'm Tom, and I'll be your instructor for this course. Before we learn a single entry signal, we start with the lesson that matters most: risk management. Quick note first, everything here is for education, not financial advice. Here's the hard truth. No strategy wins every time. Even great traders lose on forty to sixty percent of their trades. What separates them is that their losses are small and controlled, and their winners are bigger than their losers. Look at this chart. We have a trade idea, and our entry is right here. The first question is not, how much can I make? It's, where am I wrong? We place our stop loss below the recent structure, where the idea is clearly invalidated. The distance from entry to stop is our risk. We call that distance one R. Then we set a target. Here it's two R away, twice the distance of our stop. If we're right, we make two units of risk. If we're wrong, we lose one. And here's what happened. Price climbed and hit our target for a plus two R trade. But remember, the result of one trade doesn't matter. The process repeated hundreds of times is what matters. Now, position size. Decide what percent of your account you'll risk, usually one percent. Multiply that by your account. Then divide by the distance between your entry and your stop. That's how many shares you buy. Why does this work? With two R winners and one R losers, you only need to be right about one trade in three to break even. Anything above that is profit. That's the math that keeps professionals in business. Let's recap. Find your stop first. Size your position from that stop. Aim for at least two R. And never risk more than you planned. Every strategy in this course sits on top of these rules. See you in the next lesson.
▶ Watch Risk Management & Position Sizing on TradeSchool