How Much Capital Should I Risk on Each Trade?

You do not want to risk more than 1% of your capital on any trade (1% or less is ideal, 2% should be the absolute maximum). You can use all your capital for one trade, but you must set a stop that will get you out of the position if 1% of your capital is lost. For instance, if your account is $ 30,000, you can buy 1000 shares of a $ 30 stock, but if the stock drops to $ 29.70 you must exit your position as you will have a loss of $ 300 which is 1% of your capital.

This exit point is planed before the trade is placed. Also remember commissions, fees, and slippage should be taken into account when determining your 1% loss exit point. Losses do not have to be 1%, they can be much less, and as your account grows you will risk less on each trade relative to your account size. You may only want to risk 0.5% on any given trade once your account has grown.

You may also choose a fixed dollar stop. This should be less than 1-3% of your trading capital. For instance, a trader with a $ 100,000 account may not wish to risk $ 1000 (1%) on a trade, so instead they may choose to risk only $ 700, $ 500, or even less. Once they know what the maximum amount of capital they are willing to risk is, they can set a stop level and then determine the position size that they should take.

Stops and position size are very important in controlling risk. A stop level should be set before a trade is taken. This stop level in combination with the dollar amount we are willing to risk on the trade (from our account) lets us calculate what our ideal position size should be. If we choose a random position size, it is hard to stick to the stop levels we set, or stick to the maximum risk we prescribed for the trade.