Money 101 · Module 6 of 6: Risk · Lesson 2 of 3 · 5 min read
Deciding risk before a trade
Before you buy anything as a trade, decide how much you are willing to lose if it goes wrong. That one decision, made in advance, tells you how many shares to buy.
Risk a small, fixed part of your account
One way to manage risk is to limit the loss on any single trade to a small, fixed percentage of your account, such as 1%. The exact number is a personal choice, not a rule. What matters is that it is small and that you decide it before the trade, not during it.
A small fixed risk means a run of losing trades hurts but does not end your trading. Ten losses in a row at 1% each leave €10,000 × 0.99^10 ≈ €9,044. The same ten losses at 10% each leave €10,000 × 0.90^10 ≈ €3,487.
The stop-loss sets the size
A stop-loss is the price at which you will sell if the trade goes against you. Choose it from the chart or your plan – the point where your reason for the trade no longer holds – not from how much you would like to buy.
Once you know the stop, the position size follows from a simple formula:
Money at risk = account × risk %
Risk per share = entry price − stop price
Position size = money at risk ÷ risk per share
A worked example
Say your account is €10,000 and you risk 1% per trade. You plan to buy at €50 with a stop-loss at €47.50.
Money at risk: €10,000 × 1% = €100
Risk per share: €50 − €47.50 = €2.50
Position size: €100 ÷ €2.50 = 40 shares
Position value: 40 × €50 = €2,000
What the example shows
You buy €2,000 worth of shares, but you only risk €100 of it. If the price falls to your stop, you lose 40 × €2.50 = €100, which is the 1% you chose. A wider stop means fewer shares; a tighter stop means more shares, with the same €100 at risk.
A stop-loss is not a guarantee. If the price jumps past your stop, for example overnight or after news, your order can be filled at a worse price and the loss can be bigger than planned. Fees also add to the loss.
Before you place the trade
Write down the entry, the stop and the size before you click buy, and do not move the stop further away once you are in the trade. If the size the formula gives feels too big, the stop may be too tight or the trade may not suit your account. You can also check how win rate and reward-to-risk work together with the win rate calculator.
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Key takeaways
Decide how much you are willing to lose before you trade, as a small fixed % of your account.
A stop-loss limits the planned loss, but prices can jump past it.
Try it
The calculator is prefilled with a €10,000 account, 1% risk, entry €50 and stop €47.50. Move the stop and watch how the position size changes while the money at risk stays the same.
Not quite. A random tight stop can get hit by normal price swings.
Not quite. The stop should set the size, not the other way round.
Right. The stop comes from the plan, and the size follows from it.
Show the answer
The point where your reason for the trade no longer holds – Choose it from the chart or your plan – the point where your reason for the trade no longer holds – not from how much you would like to buy.
Can you lose more than planned with a stop-loss?
Not quite. Gaps can affect any position size.
Right. The order can be filled at a worse price, for example after a gap overnight.
Not quite. A stop does not guarantee the price you get.
Show the answer
Yes, if the price jumps past the stop – If the price jumps past your stop, for example overnight or after news, your order can be filled at a worse price and the loss can be bigger than planned.
After ten losses in a row at 1% risk each, about how much is left of €10,000?
Not quite. Each 1% loss is taken from a slightly smaller balance, so the total loss is a bit less than €1,000.
Not quite. That is the result at 10% risk per trade.
Right. €10,000 × 0.99^10 ≈ €9,044.
Show the answer
About €9,044 – Ten losses in a row at 1% each leave €10,000 × 0.99^10 ≈ €9,044.
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Education, not advice. I'm not a financial adviser and I don't know your situation. These tools show the maths behind common rules of thumb; check important decisions with a qualified professional. Full disclaimer.
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