Professional traders do not focus on how much money they can make—they focus on managing their risk. In this guide, we analyze the math behind position sizing and explain how to compound your account balance safely.
The Rule of 1%
The foundation of risk management is never risking more than 1% of your account equity on any single trade setup. If you have a $50,000 account, your maximum risk per trade should be $500.
To calculate your position size:
- Position Size = Risk Amount / Stop Loss Distance (in ticks/pips)
By adjusting your size based on your stop distance, you ensure that even if you hit a stop loss on a trade with a wider stop, you still only lose exactly $500. This math keeps your losses consistent and manageable.
The Power of Compounding
Compounding is the process of adjusting your 1% risk relative to your growing account balance. As your account balance grows, your 1% risk increases in dollar terms, allowing you to scale up sizes and compound your profits exponentially without increasing your percentage exposure.
