Risk per Trade Explained: Entry Price, Stop Distance, and Account Size

What “risk per trade” means

Risk per trade is the amount you plan to lose if your stop-loss is hit on a single trade. A stop-loss is a predefined exit that limits loss when price moves against you. Many beginners set risk per trade as a small percentage of account size (for example, 0.5%–1%) or as a fixed dollar amount. The goal is simple: keep losses small and consistent so a string of losing trades does not threaten your account.

Think of risk per trade as your budget for one attempt. It does not predict the outcome; it controls what you pay to find out if your idea works.

The three inputs that drive it

1) Entry price

Entry price is where you plan to buy or sell. Being precise with entries helps you size the position accurately. Consider slippage (the difference between expected and executed price) when markets are fast.

2) Stop distance

Stop distance is the gap between your entry and your stop-loss. A wider stop gives the trade more room but reduces position size; a tighter stop increases size but may get hit by normal noise. Place the stop where your trade idea is invalidated, not where the loss merely “feels” small.

3) Account size

Account size is the capital you base risk on (often your equity). Choosing a consistent risk percentage ties each trade’s loss to your account’s scale. As your equity changes, your allowed dollar risk adapts automatically.

Turning risk into position size: a simple walkthrough

1. Choose your risk per trade. For example, risk 1% of a $10,000 account ($100). Many beginners use 0.25%–1% to stay conservative.
2. Mark entry and stop. Suppose you plan to enter at $50 and place your stop at $48.50. The stop distance is $1.50.
3. Find your risk per unit. Each share risks $1.50 if the stop is hit.
4. Size the position. With $100 risk and $1.50 risk per share, you can take 66 shares (round down to stay within the risk).
5. Sanity-check the trade. If your likely profit target is too close, your potential reward may not justify the risk. Aim for a favorable reward-to-risk ratio before placing the trade.

Example wrap-up: Account size $10,000; risk per trade $100; entry $50; stop $48.50; position size 66 shares. If the stop is hit, the planned loss is about $99. If the trade instead reaches a target $3 above entry, the potential profit is roughly $198 (before costs). This simple, repeatable process keeps losses controlled and expectations realistic.

Practical tips and common mistakes

• Base stops on structure or volatility. Place stops beyond recent swing highs/lows or typical daily range so normal fluctuations don’t knock you out.
• Avoid widening stops after entry. If your stop is threatened, your thesis may be invalid. Taking the planned loss preserves your edge and account.
• Include costs and slippage. Add a small buffer to position size or risk to account for commissions and less-than-perfect fills.
• Recalculate as equity changes. If your account grows or draws down, your risk per trade will adjust. This helps keep risk steady relative to your capital.
• Backtest and rehearse. Practice your entry, stop placement, and sizing process on historical charts. Repetition builds consistency without real-money risk.

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