Risk Based Position Sizing

Risk losing the same amount with each trade...

It is hard to achieve a win rate that defies the principles of randomness. A 55% win rate is no better than random. When you get to 60% or even better, 65%, which is pretty much considered to be the maximum you can achieve with any system - scalping not included - you’re pretty much set up for a profitable career.

Remarkably, as hard as is it is to achieve that winning edge, it is still incredibly easy to come up with a negative balance between all your trades if you don’t size your positions in accordance with your odds.

What are the odds? Every time you take a trade, your odds are the same. No matter how good you are, your chances of getting a win this time, are never higher than 65%. So you when you take the trade, you don’t know if you’re going to win or lose. Therefore, you have to make sure that each time you lose, you lose the same amount of money. This amount is called your Standard Risk, or 1R.

Some people wave this as complex, and say they just enter with 5% of their account on each trade, claiming that they risk 5% of their account on each trade. This is a mistake. You only risk 5% of your account this way if you intend to let it go to zero.

It is simple logic: your risk is the loss you’ll end up with when you stop out. Your risk is not the size of your position. If you always enter with the same size, you end up with random losses, and you are not managing risk. Then it just takes one trade to give back the hard earned gains of the last 15 trades, and it destroys you mentally.

Always manage risk!

Managing risk hasn’t changed the way I approach a setup. Instead, managing risk was the key that allowed me to become consistently profitable, and I come up with profits, even when trades go against me.

My way of managing risk allows me to have a huge position size sometimes, while not risking more than 1R. Other times, the calculation results in a smaller size. In the end, you just have to accept what the market gives you.

I only ever size around my standard set of rules, and I never make an exception. Because of the way I do it, I often don’t have enough capital in my account to even risk 1R. That is how powerful this is!

The key to becoming consistently profitable, is risk management.

Here is how I do it: