If you cannot say in advance, in pounds, what you are willing to lose on a trade, you are not trading. You are gambling with a chart open.
This is not a moral claim. It is operational. Without a defined risk per trade, you have no edge — because an edge is a statistical statement about expected outcome per unit of risk, and if the risk is undefined, the edge is incalculable. Every other discipline in your trading depends on this one being in place.
This article gives you the practical mechanics. The three-number triangle that defines a trade. How to calculate each. Where retail traders systematically get this wrong. The R-multiple framework that lets you compare trades across timeframes and assets. And the 1% rule, why it works, and when you might deviate.
Two reasons, both psychological.
First, after entry, your rationalisation machinery is online. Every decision you make about the trade is now filtered through the need to feel okay about a position you already hold. Decisions made under that filter are unreliable. The risk needs to be decided when you have no money on the line and no emotional attachment — meaning, before the entry.
Second, defining risk after entry is structurally impossible to do honestly. If you set the stop after entering, you set it where the chart “suggests” or where you can “afford” the loss to be — both of which are post-hoc rationalisations of a position you took without thinking. The real number is whatever was calculated from cash-risk-first arithmetic, decided sober, before the click.
If you have ever moved a stop further out because price was approaching it, you have experienced the failure mode this article exists to prevent.
Every trade is fully described by three numbers. They are mathematically related: any two determine the third.
Cash risk. The pounds you accept losing if this trade hits the stop. Decided first, in pounds, as a percentage of your account.
Stop distance. The distance from entry to stop, measured in price units (ticks, points, percent, whatever your asset uses).
Position size. The number of shares, contracts, lots, or units of the asset.
The relationship: cash risk = stop distance × position size × tick value.
You define the cash risk first, the stop distance second (from your method), and the position size is derived. Most retail traders define position size first (“always 1 contract” or “always 100 shares”), let the stop distance vary with the chart, and let the cash risk fall wherever it lands. That is gambling. The system this article describes is the inverse, and it is what professional traders do without thinking.
Take your account balance. Multiply by your per-trade risk percentage (we will get to 1% in a moment). That is the cash risk for this trade.
£10,000 account, 1% per trade = £100 cash risk.
£25,000 account, 1% per trade = £250 cash risk.
£50,000 account, 0.75% per trade = £375 cash risk.
Recalculate when the account changes meaningfully. Not every trade — that produces over-fitting to recent variance. Recalculate weekly or monthly, using the actual balance at that point.
Where does your setup say the stop goes? It might be a percentage from entry, an ATR multiple, a recent swing point, a structural level. Whatever it is, the stop distance is determined by the trade structure, not by what you can afford to lose. The stop has to be in a logical place for the setup to be valid; if the chart says the stop belongs at £X away, that is where it belongs.
Measure the distance in whatever units the asset uses.
Position size = cash risk ÷ (stop distance × tick value).
For shares: position size = cash risk ÷ (entry price − stop price).
For futures: position size = cash risk ÷ (stop distance in points × point value per contract).
The arithmetic is one line. Many platforms calculate it for you. There is no reason to skip this step, ever.
If the calculated position size is fractional and you cannot trade fractions of that asset, round down. Rounding up increases your risk above your defined limit; rounding down keeps you under it. Always under.
The trader always risks £200 per trade, regardless of whether the account is £5K or £50K. At £50K, that is 0.4% — defensible. At £5K, that is 4% per trade — ruinous after a normal losing streak. Cash risk has to scale with the account.
The trader always takes 1 contract or 100 shares. The cash risk then varies wildly based on where the stop happens to be. Two trades with the same position size can have wildly different actual risk; the trader is not running a consistent system.
The trader enters, then looks at the chart for a place to put the stop. The stop ends up wherever feels comfortable, which is usually too tight (and gets stopped out on normal noise) or too wide (and produces oversize losses). The stop has to be defined by the setup, before the click.
A large position with a tight stop and a small position with a wide stop can carry identical risk. Traders who only think about position size, not about the stop distance interacting with it, do not have a clear picture of what they are actually exposed to.
“This setup looks really clean, I’m going to size up.” Conviction is not a measure of probability; it is a measure of feeling. The trades that feel cleanest are not systematically the trades that work best, and sizing based on conviction means the worst trades carry the largest losses. Hold risk constant per setup; let the edge produce the variance.
R is the unit of risk on this trade. If your cash risk is £100, then 1R = £100. A trade that produces a 2R win produced £200. A trade that produces a 0.5R loss produced −£50.
R-multiples are asset-agnostic and timeframe-agnostic. They allow you to compare a 5m crypto trade with a daily-chart equity trade on the same axis. They translate the variance of position sizes and stop distances into a single comparable number.
Once you trade in R, the mental loop changes. You stop noticing that you made or lost £X on this trade; you notice that you took a 1R loser or a 2R winner. The cash framing fades. The edge framing rises. Almost every disciplined trader logs trades in R.
The single most useful number this framework produces is expectancy: the average R per trade across a sample. If your last 50 trades have an expectancy of +0.4R, your edge is real — over time, you make 40% of your per-trade risk on every trade you take, on average. That is a number you can multiply by trade frequency to project a year.
The standard recommendation is to risk 1% of account per trade. This is conservative for two specific reasons.
First, 1% per trade allows you to survive long losing streaks without ruin. A 10-trade losing streak takes the account to roughly 90.4% — uncomfortable but survivable. A 20-trade streak (statistically possible inside many edges) takes it to 81.8%. Recoverable. At 2% per trade, the same 20-trade streak takes the account to 66.8%, and your nervous system at that point is not in a state to keep executing.
Second, 1% allows for psychological survivability. The cash size of a 1% loss is small enough that you can take it without the body-level resistance that produces stop-widening and averaging-down. If your 1R loss feels emotionally enormous, your size is too big and your edge will not function under live pressure.
When to go lower: building a track record (start at 0.5%); during a regime change in the market; immediately after a drawdown of 10% or more.
When to go higher: very rarely. The case for 1.5-2% exists for traders with multi-year track records, robust edges, and well-tested discipline. For everyone else, 1% is the working number, and deviating from it is more likely to be ego than analysis.
Risk has to be defined before entry, calculated in the order cash risk → stop distance → position size, and tracked in R-multiples. The 1% rule is the default; deviating from it requires real reason. Every other discipline in your trading sits on top of this one. Without it, you do not have a system — you have a chart you click sometimes.
Next planned: Fully Accepting Risk Before Entry — what Douglas really meant by the third Principle of Consistency, and the difference between knowing your risk and accepting it.