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Risk Management Trading: How Much to Risk per Trade

Trading

John Bax and Crypto Go Team · Published · Updated · 12 min read

Risk management trading means deciding, before you open a trade, how much you are willing to lose on it and how much you can lose in total, and then sizing the position so that a loss stays inside those limits. In practice it comes down to a few numbers: the share of your account you risk per trade, the price where you admit the idea was wrong (the stop loss), the resulting position size and a cap on leverage. This guide shows how to work out each number, with a worked example, and why a trader can be right often and still lose the account.

In brief

  • Risk management trading starts from the loss you accept on one trade, not from the profit you hope for.
  • Many traders risk a small, fixed share of the account on each trade, because a string of losses is normal and must not end the account.
  • Position size follows from two things: the amount you accept to lose and the distance between your entry and your stop loss.
  • Leverage does not set your risk, but a high leverage can place the liquidation price too close to your stop, so choose it last.
  • No rule removes losses, and a stop loss is not a guaranteed exit price in a fast market.
Risk Management Trading: How Much to Risk per Trade
In this article · 12 min read
  1. Why losses decide who stays in the game
  2. Risk management trading: the four numbers to decide first
  3. How to calculate position size
  4. What a losing streak does to the account
  5. Leverage and risk management trading
  6. Advantages and limits of fixed-risk rules
  7. Where Crypto Go Bot fits
  8. Checklist before every trade
  9. Who it is for
  10. Key terms
  11. Frequently asked questions
  12. Sources

Why losses decide who stays in the game

Every trading method loses sometimes. What differs is whether a losing period is a bruise or the end of the account. The fall of an account from its previous high is called a drawdown: US futures rules define it as the losses of an account over a given period, and the worst peak-to-valley drawdown as the largest cumulative percentage fall before the previous high is regained (17 CFR 4.10). A drawdown is not a sign that something went wrong; it is a normal part of trading. The question risk management answers is how deep a drawdown you can survive.

The reason is simple arithmetic: the deeper the loss, the larger the gain needed to get back to where you started.

Loss on the accountGain needed to recover
10%about 11%
25%about 33%
50%100%
75%300%
90%900%

Supervisors' studies show how often retail traders using leverage end up with a loss. The French financial markets authority (AMF) found that more than 89% of retail clients trading contracts for difference (CFDs, leveraged contracts on the price of an asset) and forex lost money over four years, with an average loss of €10,887 per client (AMF study, 13 October 2014). The UK Financial Conduct Authority (FCA) found 82% in a sample of client accounts (consultation paper CP16/40, December 2016), and the Central Bank of Ireland 75% for 2013 and 2014 (letter on its themed inspection, 23 November 2015). These products are not crypto futures, but they share the same ingredients: margin, leverage and short holding periods.

Risk management trading: share of retail CFD clients who lost money, by supervisor study

In more than 10 years of trading Bitcoin, crypto and traditional markets, the lesson we keep coming back to is a plain one: a good entry matters less than knowing in advance what a loss will cost.

Risk management trading: the four numbers to decide first

Before you place an order, write down four numbers.

  1. The risk per trade. The amount you accept to lose if the trade fails, usually written as a share of the account. Some traders choose 1% or 2%, others less. There is no correct figure, only a figure you can live with after several losses in a row.
  2. The stop loss. The price at which you close the trade because your reason for it no longer holds. It should come from the chart or the setup, not from the amount you would like to lose. Our guide to stop loss and take profit explains how to place it.
  3. The position size. The number you calculate from the first two (see the next section).
  4. The cap on total risk. The most you accept to have at risk across all open trades together. Several trades on similar coins often move together, so three open positions can behave like one large one.

Risk management trading: decide the loss you accept, set the stop, calculate the position size, then check leverage and total risk
Risk management trading: from the loss you accept to the position size

How to calculate position size

The formula is short: the position size equals the amount you accept to lose divided by the distance from entry to stop, expressed as a share of the entry price.

A worked example, with round numbers:

  1. Your account holds 5,000 and you accept to risk 1% on this trade, so 50.
  2. You plan to buy at 100 and your stop loss is at 95, a distance of 5%.
  3. The position size is 50 divided by 0.05, which is 1,000, or 10 units at a price of 100.
  4. If the stop is hit, the loss is about 10 units times 5, so 50, which is the amount you accepted.

Notice that the position is a fifth of the account (1,000 out of 5,000) even though only 1% is at risk. A tighter stop would allow a larger position for the same risk, and a wider stop a smaller one. That is why a wide stop combined with a large position is a common mistake: the position was sized for a stop that was never going to be used.

Real trades cost a little more than the formula says. Fees and the spread (the gap between the buying and the selling price) add to the loss, and the stop may be executed at a worse price than planned, which is called slippage. A regulatory notice of the Financial Industry Regulatory Authority (FINRA), the self-regulator of US brokers, recalls that firms should tell customers that stop prices are not guaranteed execution prices: a stop order becomes a market order when the stop price is reached, so in volatile conditions it can be executed at a significantly different price. Research by the US Commodity Futures Trading Commission (CFTC) on stop orders in futures markets describes the same purpose, preventing loss from large price moves without watching the position all the time. Leave a margin for this in your numbers.

What a losing streak does to the account

A losing streak is not unusual, so it is worth seeing what it costs at different risk levels. The table shows the account after ten losing trades in a row, with the same share risked each time.

Risk per tradeAccount after 10 losses in a row
1%down about 9.6%
5%down about 40%
10%down about 65%

These are simple calculations, not forecasts, and they ignore fees. The point is the shape: with a small risk per trade, a bad run hurts but leaves you able to continue and think; with a large one, the same run takes most of the account, and the gain needed to recover (see the first table) is out of reach.

Leverage and risk management trading

Leverage lets you open a position larger than the money you post as margin, the collateral the exchange holds while the position is open. The CFTC notes that leverage amplifies the underlying risk, so that a change in price becomes even more significant, and that when markets move against you in a margin account, you may be forced to add funds or close the position and in the end lose more than your initial investment. Our guide to leverage in crypto trading covers this in detail.

Two points matter for risk management:

  • Position size, not leverage, sets your risk per trade. In the example above the risk is 50 whether you post 1,000 as margin or only 200. Leverage only changes how much of your account is tied up as margin.
  • Leverage decides how close the liquidation price is. That is the price at which the exchange closes the position because the margin is nearly used up. In the example, with 20x leverage you would post only 50 for a 1,000 position, and a 5% fall would roughly use it up (ignoring fees and the maintenance margin, the minimum collateral needed to keep the position open). Your stop and your liquidation would then be almost the same price. Kraken's educational material notes that placing a stop loss above the liquidation price gives you a controlled exit and avoids the additional liquidation fee. Kraken's support page also states that its derivatives allow up to 100x leverage, with profits and losses both exponentially higher.

A sensible order is therefore: choose the risk, find the stop, calculate the size, and only then pick the lowest leverage that lets the position fit comfortably, keeping the liquidation price well beyond the stop.

Bitcoin flash crash driven by the liquidation of billions in long positions (CNBC) (in English)

Advantages and limits of fixed-risk rules

Advantages

  • Survival. A small fixed risk keeps a normal losing streak from ending the account.
  • Decisions made calmly. The numbers are chosen before the trade, when you are not under pressure.
  • Comparable results. When each trade risks the same amount, you can see whether your method works over many trades.
  • Less room for emotion. A rule is harder to bend than an intention.

Limits

  • The rules do not make a strategy profitable. They limit the damage of a poor one; they do not create an edge.
  • Gaps and fast markets. Prices can jump past your stop, so the real loss may be larger than planned.
  • Correlation. Many coins fall together, so several small positions can add up to one large risk.
  • Discipline. The rules only work if you keep to them, including after a loss.

John Bax's view

In Cryptocurrency Investing, John Bax stops calling short-term crypto trades an investment. He treats the money like the capital of a small online business that can go well or badly: a separate starting budget (he suggests at least $5,000, a rule of thumb from 2023), no monthly top-ups as with dollar-cost averaging (DCA), and only money you are willing to lose, once a cash reserve for life's surprises has been set aside. Seen this way, the risk per trade in this guide applies to that budget, never to all your savings.

Where Crypto Go Bot fits

Crypto Go Bot, which we built, trades automatically on your own Kraken account through a Futures trading API (application programming interface, the access key that lets software trade on your account) that you create. It cannot withdraw funds, and take profit and stop loss orders are placed on Kraken. Every hour it receives the Crypto Go Smart Money Flow, our reading of the money entering and leaving wallets of investors with a proven track record, graded Low, Medium or Strong. You choose the minimum strength, the token size and the blockchains to follow, and beside each setting you see the value we use ourselves.

For risk management, this means the size of each trade and the filters are settings you decide and can change, rather than something you improvise in the moment. It also closes trades at a loss, and no system can guarantee profits. You can read the full overview in our article on the crypto trading bot.

Checklist before every trade

  • I know how much I accept to lose on this trade, and it is a small share of the account.
  • My stop loss is based on the setup, and it is placed together with the trade.
  • I calculated the position size from the amount at risk and the distance to the stop.
  • My leverage is low enough that the liquidation price is well beyond the stop.
  • The total at risk across all my open trades is within the cap I set.
  • I have counted fees and accept that the stop may fill at a worse price.
  • The money involved is money I can afford to lose.

Who it is for

These rules matter to anyone who opens trades with a stop and a defined size, whatever the market.

  • Beginner with a small account: a fixed risk of 1% or less keeps the first losing streak, which most traders meet sooner or later, affordable while you learn how your method behaves.
  • Part-time trader with a job: deciding the risk, the stop and the size before the order goes in means nothing has to be improvised during the working day, when you cannot watch the screen.
  • Trader using leverage on futures: sizing from the stop first and choosing the lowest workable leverage last keeps the liquidation price away from the exit you planned.
  • User of a trading bot: the same numbers become the bot's settings, so the size of each trade and the total amount at risk stay your decision.

Key terms

  • Risk per trade: the amount you accept to lose if one trade reaches its stop, usually written as a share of the account.
  • Position size: the value of the trade, calculated from the risk per trade and the distance to the stop.
  • Drawdown: the fall of the account from its previous high, before it recovers.
  • Margin: the collateral you post to open a leveraged position.
  • Liquidation price: the price at which the exchange closes a leveraged position because the margin is nearly used up.
  • Slippage: the gap between the price you planned and the price at which the order is actually filled.

Frequently asked questions

How much should I risk per trade?

There is no figure that suits everyone. Some traders risk 1% or 2% of the account on each trade, others less. A useful test is to ask whether you could take ten losses in a row at that level and still continue calmly. If not, lower it.

What is the 1% rule in trading?

It is a rule of thumb in which you do not risk more than 1% of the account on a single trade. It limits the loss, not the size of the position: with a stop loss 5% away, a 1% risk allows a position equal to 20% of the account.

How do I calculate position size?

Divide the amount you accept to lose by the distance between your entry and your stop loss, expressed as a share of the entry price. With 50 at risk and a stop 5% below the entry, the position is 50 divided by 0.05, so 1,000.

Does a stop loss guarantee my maximum loss?

No. A stop loss is meant to close the trade when the price reaches a level, but in a fast market it can be executed at a different price. Gaps and slippage can make the real loss larger than planned, so allow some margin in your numbers.

Does leverage increase my risk per trade?

Not by itself, if the position size is calculated from the amount you accept to lose. Leverage changes how much margin is tied up and how close the liquidation price is, and a high leverage can put it dangerously near your stop.

Can a trading bot manage risk for me?

A bot can apply your rules consistently, but it cannot remove risk. The settings, the size and the amount you put in remain your decisions, and any bot can lose money.

Sources

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