Risk Management: Position Sizing and Stop Losses#

Risk management is what separates profitable traders from losing ones. Even with a win rate of just 40%, a trader can be profitable if their average gains are twice their average losses. It all comes down to position sizing and the stop loss.

The 1% Rule#

The fundamental rule: never risk more than 1% of your total capital on a single trade. With capital of EUR 10,000, your maximum loss per trade is EUR 100. This rule guarantees that even a run of ten consecutive losses costs only 10% of your capital.

The Position Sizing Formula#

Position size = (Capital × Risk%) / (Entry price − Stop loss price). Example: capital EUR 10,000, risk 1% = EUR 100, a stock at EUR 50, stop loss at EUR 47 (distance = EUR 3). Size = EUR 100 / EUR 3 = 33 shares. Total cost = 33 × EUR 50 = EUR 1,650.

Types of Stop Loss#

• Fixed stop: placed at a price level decided in advance (technical support, a set percentage)
• Trailing stop: follows the price upward and protects gains (for example, 2% below the high)
• ATR stop: based on volatility (Average True Range). For example, 2× ATR below the entry price
• Time stop: exit if the trade has not moved your way after X periods
• Mental stop: not recommended — too vulnerable to emotion; use an automatic stop instead

The Risk/Reward Ratio#

The R:R (Risk:Reward) ratio compares the risk taken against the profit target. A ratio of 2:1 means you are aiming for EUR 2 of gain for every EUR 1 risked. At 2:1, you can lose 60% of your trades and still be profitable. The best traders aim for a minimum of 3:1.