Risk per trade

A fixed fraction of equity

The most widely used sizing rule starts from a single number: the fraction of your account you are prepared to lose if the next trade hits its stop. It is expressed as a percentage of equity, and for most traders it sits somewhere between 0.5% and 2%.

Risking 1% on a 10,000 euro account means the trade may lose 100 euros. Not the position size, not the margin: the loss. If the stop is hit, the account is 9,900. That is the whole rule, and the arithmetic in the next lesson exists only to turn it into a number of lots or contracts.

Two things about it are easy to miss. The fraction applies to the current equity, so the euro amount shrinks in a drawdown and grows as the account grows. And it is decided once, in advance, not per trade. The trade that looks certain gets the same 1% as the one you are unsure about.

What a losing streak costs

Every strategy has losing streaks, including ones with a genuine edge. A strategy that wins half its trades will produce seven straight losses about once in every 128 runs of seven trades, which over a few hundred trades is a matter of when, not if.

Because each loss is a fraction of what is left, the losses compound. The table shows what remains of the account after a streak at different risk levels:

Losses in a row	Risk 0.5%	Risk 1%	Risk 2%	Risk 5%	Risk 10%
5	97.5%	95.1%	90.4%	77.4%	59.0%
10	95.1%	90.4%	81.7%	59.9%	34.9%
15	92.8%	86.0%	73.9%	46.3%	20.6%
20	90.5%	81.8%	66.8%	35.8%	12.2%

At 1%, ten losses in a row cost under 10% of the account and the strategy is still very much alive. At 5% the same streak has removed 40%, and at 10% it has removed two thirds. The strategy did not change. Only the fraction did.

Recovery is not symmetrical

The reason the table matters is that getting back is harder than falling. After a 10% drawdown the account needs an 11% gain to return to its peak. After 40% it needs 67%. After 65% it needs 186%. The maximum drawdown lesson in the track record series gives the full table. The short version is that below about 20% the climb back is routine, and past 40% it starts to require a different strategy from the one that got you there.

So the fraction is really a choice about the worst drawdown you are prepared to sit through. Pick the deepest fall you could watch without abandoning the rules, work out what streak your strategy can produce, and the table tells you the fraction.

Choosing your fraction

There is no correct number, but there is a way to reason about it:

• Start with the streak, not the win rate. Look at the longest losing run in your own history or in the strategy’s track record, add a few, and check what that streak would cost at each fraction.
• Count in euros. 2% sounds small. On a 50,000 euro account it is 1,000 euros per trade, and ten losses is 9,000. If that number would change your behaviour, the fraction is too high.
• Lower it for correlated positions. A long in gold, a long in silver and a long in a gold mining share are three trades on one idea. If each risks 1%, the account is risking close to 3% on the same outcome. Per-trade risk and total open risk are different numbers, and a later lesson covers the second.
• Lower it while you are new. A rule you have not yet been tested by deserves a smaller number than one you have lived with through a drawdown.
• Lower it for instruments that gap. A stop on a share CFD can be jumped over by an earnings announcement, and a stop on an index can be jumped over by a weekend. Where the realistic loss can exceed the planned one, plan with a smaller fraction.

Why the fraction shrinks in a drawdown

Because the rule is a percentage of current equity, every loss makes the next trade slightly smaller, and every gain makes it slightly larger. After a 20% drawdown, the 1% rule risks 80 euros instead of 100. This is the opposite of what feels natural, and it is the point. Sizing down as the account falls is what makes ruin mathematically unlikely. Sizing up to win it back is how most accounts end.

The same rule on futures and options

The fraction does not change with the instrument. What changes is whether the instrument lets you honour it. A futures contract has a fixed size, so on a small account one contract may already risk more than the fraction allows, and the rule then says not to take the trade rather than to take it too large. For a bought option, the premium is the maximum loss, so the fraction is applied directly to the premium: 1% of a 10,000 euro account buys at most 100 euros of options on one idea, however many contracts that turns out to be.

The rule inside a copied strategy

When you copy a strategy, this decision has already been made by the provider, and the copying settings scale it to your account. What you should still check is whether the rule is fixed. A track record whose losses grow after earlier losses, or whose position sizes vary far more than the equity does, is one where the fraction is not a rule at all. The lesson on reading Myfxbook critically shows where to look.