How Much Risk on a Trade

Understand how to adjust position sizes based on the context of the market. Dynamic position sizing adjusts risk based on trade dependability and strength, optimising profit and minimising drawdowns.

The amount you risk on a trade depends on your position size, which is usually based on a percentage of your account balance. There are two broad ways to determine the amount you should risk: a static approach and a dynamic approach.

The Static Approach

A common mistake many traders make is using static position sizes.

This approach involves using the same position size for every trade, regardless of the opportunity or the amount at risk. For example, a trader might always open 1 lot for every trade. This can lead to uneven risk exposure especially when different trades require different stop-loss levels.

Imagine two trades:

Trade 1 has a 30-pip stop loss
Trade 2 has a 80-pip stop loss

Using 1 standard lot in both cases would risk $300 on the first trade and $800 on the second.

But what if the first trade has a better probability of success? By using static position sizing, you're risking more on the weaker opportunity and less on the stronger one. That doesn’t sound logical.

The Dynamic Approach

We’d recommend using a dynamic approach. This is where you take into account the strength and dependability of an opportunity.

Trades that have a higher probability of success can have a bigger position size. Whereas trades with a lower probability have a smaller position size. We do this because lower probability trades have a higher probability of losing streaks, which push you into a drawdown.

If we're profitable overall, a drawdown shouldn’t matter. However, going into deep drawdowns can play on our emotions and negatively affect our trading.

When deciding how much to risk we’re protecting our downside. We look at the chance of losing money and make sure our drawdown doesn’t become too big.

We can set our minimum risk at 0.3% and our maximum risk at 2%. That means our weakest trades will be 0.3%, and our best trades at 2%. There’s probably a variation in the trades you take, and these should fit along a scale between those two position sizes. More dependable trades are higher, and less dependable trades are lower.

In order to do this, you need a broad understanding of the probabilities. This is something we’ll cover separately.

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