Risk management: position size, stops and daily limits
Risk management decides whether you survive long enough to get good. Three tools do most of the work.
1. A fixed risk per trade
Decide in advance the most you'll lose on any single trade, either a dollar amount or a small percentage of your account. Many traders keep it to around 1% or less per trade, so a normal losing streak dents the account rather than ending it. At 1% per trade, ten losses in a row cost about 10%. At 10% per trade, the same streak can wipe you out.
2. A stop on every trade
Your stop is the price where your trade idea is wrong, so it goes where the setup fails, not at whatever dollar amount feels comfortable. Put it in when you enter (a bracket order does this for you) and never move it further away. Moving stops is one of the most common ways small losses turn into big ones.
3. Size the position from the stop
Once you know your risk and your stop, the number of contracts follows:
contracts = risk per trade ÷ (stop distance × value per point), rounded down.
- Risking $200 with a 10-point stop on MES ($5 per point): each contract risks $50, so you can trade 4.
- The same $200 and 10-point stop on MNQ ($2 per point): $20 per contract, so 10.
Notice the stop sets the size, not the other way around. A wider stop means fewer contracts for the same risk. The position size calculator does this for every major futures contract.
4. A daily loss limit
Set a maximum loss for the day, perhaps two or three times your per-trade risk, and stop trading when you hit it. Bad days happen. The daily limit stops a bad day from becoming a bad month, and it's the best defence against revenge trading (lesson 9). Prop firms enforce their own version; see daily loss limits, explained.
Fees count too: commissions come out of every trade, win or lose, so include them when you work out what a trade really risks.