1. Risk
Your total risk is the maximum loss limit before you stop trading with a strategy.
Can you handle losing 25% of your capital? How about 50%?
Defining your risk before entering any trade helps you avoid liquidation.
2. Risk per trade
Risking 5% a trade sounds little to many traders.
But what if you lose 10 trades in a row? That's 50% of your capital gone.
You also need to make 100% of your money back to simply return to break even.
This is why a proper risk breakdown matters.
It's lower than you think, but is the best way to manage drawdown.
Anyone trading for more than 3+ years knows how damaging 10 consecutive losses are- especially in high-volatility sectors like AI/ memes
This will protect you:
Rare Exceptions:
As you become more skilled, you'll notice moments where multiple factors that improve your performance align.
Risking 5% here (or more in rare cases) can make sense as the predicted win rate probability of these events is high, with a small sample size.
3. Position Sizing
You only need to know 3 things to calculate position sizing:
-Account size
-Risk per trade
-The distance of your stop loss
Here's the formula we use to calculate it:
For example,
If your account size is $20,000
Risk per trade is 1%
The distance to stop loss is 10%
Then your position size = (20,000*1%) / 10% = $2,000
4. Leverage
Most traders don't understand leverage.
Leverage simply changes the position size of your trades.
It does not mean you'll make high profits because your total risk % will still remain the same.
Here's an example of where you'd use leverage:
If your account size is $10,000 Risk per trade is 1%
Distance to stop loss is 0.5%
Then your Position size = (10000*1%)/(0.5%) = $20,000
$20,000 is bigger than your total account size so you can use leverage to reach this.
Using leverage is fine here because you'll still maintain 1% risk per trade.
Even with 100X leverage, your Dollar loss amount remains the same as without leverage.