How much to put in a trade

Most new traders size by feel. "I have $5,000, so I will put $2,000 in." That number says nothing about how much you can lose. Position sizing flips the order. Pick the loss you can accept first, then let the chart set the share count.

Step 1: pick a fixed percent to risk

Risk here means the money you lose if the trade hits your stop, not the money you put in. A stop is the price where you admit the idea is wrong and get out. Many traders risk 1% of the account per trade. At 1%, ten losers in a row cost about 10% of the account. That hurts, but you are still in the game.

Step 2: size = dollars at risk divided by stop distance

For a buy, the stop distance is entry price minus stop price. Divide dollars at risk by it and round down. Here is one setup, entry $40 and stop $38, in two accounts.

	$5,000 account	$25,000 account
Dollars at risk (1%)	$50	$250
Stop distance ($40 minus $38)	$2.00	$2.00
Shares (risk divided by $2)	25	125
Money in the trade	$1,000	$5,000

Each account puts 20% of its money in but risks only 1%. If the stop were $4 away instead of $2, the share counts would fall to 12 and 62. A wider stop means fewer shares, not more risk.

A stop price is a trigger, not a guaranteed sale price. A stop-market order becomes a market order when triggered and may fill well below the stop during a fast fall or after an overnight gap. A stop-limit order can remain unfilled. Either way, the loss can exceed the planned 1%.

Options: the premium is the risk

When you buy a call or a put, the most you can lose is the premium, the price you paid. One contract covers 100 shares, so a $2.50 premium costs $250 per contract. An option can expire worthless, so treat the full premium as your dollars at risk.

In the $5,000 account, one $250 contract is five times the $50 limit, so it does not fit a 1% rule. A cheaper contract further from the stock price fits the budget but usually has a lower chance of paying off. In the $25,000 account, $250 covers exactly one contract.

R-multiples: count in units of risk

R is the amount you planned to risk on a trade. Risk $50 and make $100, and that trade was +2R. Get stopped out for $50, and that was -1R. R also shows whether you really cut losers at -1R or let some drift to -3R.

Expectancy: is the method worth running

Expectancy is your average R per trade. The formula is win rate times average win, minus loss rate times average loss.

Say you took 20 trades and won 8. Winners averaged +2R and losers averaged -1R.

• Wins: 0.40 times 2R = 0.80R
• Losses: 0.60 times 1R = 0.60R
• Expectancy: 0.80R minus 0.60R = +0.20R per trade

At $50 per R, that is $10 per trade before fees, even though you lost more often than you won. Twenty trades is a small sample, so treat this as a first read. If expectancy is negative, a bigger size only loses money faster.

Cap your open positions

1% per trade stays 1% only if your trades do not all fall together. Five positions in five semiconductor stocks can move like one large position. One common cap: five open trades at most. If every stop gets hit on the same day, the damage is about 5% before any gaps. Two stocks in one sector count as closer to one trade.

Sizing a long-term pick

A long-term pick is held for months, so the clock is slower, but the math is the same. In the long-term lesson, one stock is a satellite next to the index fund core. Two limits keep a satellite small, and the smaller one wins.

Say your account is $20,000. In this example no single stock gets more than 5% of it, so $1,000 at most. A long-term card shows an entry near $50 and says the idea is wrong below $40, a $10 stop distance.

	Stop $10 away	Stop $5 away
Dollars at risk (1% of $20,000)	$200	$200
Shares the 1% math allows	20	40
Shares the 5% cap allows ($1,000 at $50)	20	20
Shares to use, the smaller number	20	20

With the stop $10 away, both limits agree on 20 shares. With the stop $5 away, the 1% math would allow 40 shares, $2,000, but that is twice the cap, so the cap keeps it at 20.

A fall below the card's wrong-below price means the reason the stock made the long-term list no longer holds on this clock. It is not a promise of what the price does next. Before you decide anything, write down in one line why you own the stock and what would change your mind.

Try this

Open a paper trading account or a spreadsheet and pretend you have $10,000, so 1% is $100. Pick three charts from your watchlist. For each one, write an entry, a stop, and the share count that risks $100. Track them in R for two weeks, then work out your average R. Three trades is only a start.