E = (W/T * A) - (L/T * B) at least 20-30 trades from the same strategy E = +€18 OR E = -€28 Where:
-
E= Expectancy -
W= Number of your winning trades -
L= Number of your losing trades -
T= Total number of trades (W+L) -
A= Your average win amount (€) -
B= Your average loss amount (€) -
Risk Management is Survival: It ensures you can withstand inevitable losing streaks and removes emotion from your decisions.
-
The 2% Rule: Never risk more than 2% of your total account on a single trade. For a €5,000 account, this is a maximum acceptable loss of €100. If a trade setup requires a bigger stop-loss, you must reduce your position size or skip the trade.
-
Taking a Loss is a Business Expense: A small, planned loss is not a mistake. It’s the cost of doing business. Taking it quickly protects your capital, keeps your mind clear, and frees up your money for the next opportunity. Allowing a small loss to become a big one is the real mistake.
Position sizing.
Position sizing is the process of deciding how many shares or units of an asset to buy or sell.1 Its only goal is to ensure that if your trade is a loser, you only lose your pre-determined amount (e.g., your 2%).
It’s the practical application of the 2% rule.
How to Calculate Your Position Size (The Quick Method)
Follow these three steps for every single trade:
Step 1: Determine Your Maximum Risk in Euros.
This is what we discussed before. If you have a €5,000 account and a 2% risk rule, your maximum risk per trade is €100.
Step 2: Determine Your Trade Risk (Your Stop-Loss).
Before you enter a trade, you must know where you’ll get out if you’re wrong. This is your stop-loss.
-
Let’s say you want to buy a stock at €50.
-
You analyze the chart and decide a safe stop-loss is at €48.
-
Your risk per share is the difference: €50 - €48 = €2 per share.
Step 3: Calculate Your Position Size.
This is the final, simple calculation:
Position Size = (Max € Risk) / (Risk per Share)
Using our example:
-
Position Size = €100 / €2 per share
-
Position Size = 50 shares
So, you would buy exactly 50 shares. If the trade hits your stop-loss at €48, you will lose 50 x €2 = €100, which is exactly the 2% risk you planned for.
By doing this for every trade, you standardize your risk. It doesn’t matter if you’re trading a €10 stock or a €500 stock; your maximum loss will always be the same.