How much should you risk on each trade? This single question determines whether you will survive long enough to become profitable. Risk too much and a few bad trades will wipe you out. Risk too little and your account will never grow meaningfully. Let us find the right balance.
What is Risk Per Trade?
Risk per trade is the maximum amount of money you are willing to lose on any single trade. It is usually expressed as a percentage of your total trading account. When a trade hits your stop loss, you should lose exactly this amount, no more.
Key concept: Risk per trade is NOT your position size. It is the dollar amount between your entry and stop loss multiplied by your number of shares or contracts.
The 1% Rule Explained
The 1% rule is the most common risk management guideline. It states that you should never risk more than 1% of your total account on any single trade.
1% Rule in Practice
Account size: $30,000
Maximum risk per trade: 1% = $300
- If your stop is $2 away from entry, you can buy 150 shares
- If your stop is $5 away from entry, you can buy 60 shares
- If your stop is $0.50 away from entry, you can buy 600 shares
In each case, if stopped out, you lose exactly $300.
Why 1% Works
The math behind 1% risk is powerful. Even with 10 consecutive losing trades, you still have 90% of your account left. This gives you enough runway to recover from even the worst losing streaks.
The 2% Rule: When More Risk Makes Sense
Some traders use the 2% rule, risking up to 2% per trade. This approach offers faster growth potential but requires greater psychological discipline and a proven track record.
Comparing 1% vs 2% Risk
Starting account: $25,000
After 5 consecutive losses:
- 1% risk: $23,809 remaining (95.2%)
- 2% risk: $22,628 remaining (90.5%)
After 10 consecutive losses:
- 1% risk: $22,663 remaining (90.7%)
- 2% risk: $20,480 remaining (81.9%)
Factors That Affect Your Risk Per Trade
There is no universal right answer. Your ideal risk per trade depends on several factors:
Win Rate
Traders with higher win rates can often risk more per trade because losing streaks are shorter and less frequent. A trader with a 70% win rate faces different math than one with 40% win rate.
Risk-to-Reward Ratio
If your average winner is 3 times your average loser, you can afford more losses. Lower risk-to-reward ratios require higher win rates or lower risk per trade.
Trading Frequency
Day traders taking 20 trades per day need lower risk per trade than swing traders taking 5 trades per month. More trades means more opportunities for consecutive losses.
Account Size
Smaller accounts often need to risk slightly more (1.5-2%) to generate meaningful returns. Larger accounts can afford to be more conservative (0.5-1%).
Psychological Comfort
The best risk level is one you can execute consistently without emotional interference. If 2% losses cause you to deviate from your plan, use 1% or less.
How to Calculate Position Size from Risk
Once you know your risk per trade, calculating position size is straightforward:
Position Sizing Formula
Shares = Risk Amount / (Entry Price - Stop Loss Price)
Example:
- Account: $50,000
- Risk: 1.5% = $750
- Stock price: $85
- Stop loss: $82
- Risk per share: $3
- Position size: $750 / $3 = 250 shares
- Position value: 250 x $85 = $21,250
Adjusting Risk Based on Setup Quality
Not all trades are equal. Many successful traders use a tiered risk approach:
- A+ setups (high conviction): Full risk (e.g., 2%)
- A setups (good setups): Standard risk (e.g., 1.5%)
- B setups (acceptable): Reduced risk (e.g., 1%)
- C setups (marginal): Minimum risk or skip (e.g., 0.5%)
Important: Tiered risk only works if you can honestly evaluate setup quality before entering. If you tend to see every trade as an A+ setup, stick to fixed risk.
Common Risk Per Trade Mistakes
Mistake 1: Calculating Risk on Position Size
Saying "I am risking 5% of my account" because your position is 5% of your portfolio is wrong. What matters is how much you lose if stopped out.
Mistake 2: Moving Stop Losses
Widening your stop loss after entry increases your risk beyond what you planned. This destroys risk management.
Mistake 3: Ignoring Correlation
If you have three positions in tech stocks, all risking 1%, your real risk might be 3% if they all move together.
Mistake 4: Not Accounting for Gaps
In volatile markets or with overnight holds, prices can gap past your stop. Consider this when setting risk levels.
Building a Risk Per Trade System
A complete risk management system includes:
- Base risk percentage: Your default risk per trade (e.g., 1%)
- Maximum daily risk: Total risk allowed per day (e.g., 3%)
- Maximum open risk: Total risk across all open positions (e.g., 5%)
- Drawdown adjustments: Reduced risk when account is in drawdown
- Scaling rules: When to increase or decrease risk percentage
Track Your Risk Per Trade Automatically
Pro Trader Dashboard calculates your actual risk per trade on every position. See if you are staying within your limits and how risk affects your performance.
Summary
Risk per trade is the most important number in your trading plan. Start conservative with 1% or less, track your results, and only increase risk when you have proven consistent profitability. Remember that survival comes before growth. A trader who protects their capital today will have capital to grow tomorrow.
Learn more about managing your trading with our guides on capital management and recovering from drawdowns.