What it means
Small fixed risk keeps normal losing streaks survivable. Ten 1% losses in a row cost under 10%.
Example
On a $25,000 account, 1% risk is $250 per trade.
In practice
Fixing the risk as a percentage of the account makes every trade the same size in the only way that matters. As the account grows the amount grows with it, and after losses it shrinks, which slows a drawdown automatically.
Most traders settle between 0.5% and 1%. New strategies and difficult periods call for less.
What to watch for
The planned risk is only real if the stop is honoured, and several trades open in related markets add their risks together. Raising risk after a few wins, or to make back a loss, defeats the purpose.
Related terms
3 terms- Position sizingChoosing your size so that your stop distance costs exactly your planned risk.
- Risk of ruinThe chance a strategy loses so much you can't or won't continue; driven mostly by risk per trade.
- DrawdownA fall from your account's peak to a later low; recovering takes a bigger gain than the loss.