Skip to content

Discipline · Lesson 4

Risk first, reward second

You will size positions from what you are willing to lose, not from what you hope to make.

beginner11 min read · +40 XP
Watch first · 20s · captions on

The short version

  • Decide what you lose before you decide what you might make.
  • Position size is arithmetic: risk amount divided by distance to your stop.
  • Survival comes before strategy. Discipline keeps you around long enough to get good.

Do this before the next open

Take your account size, pick a one percent risk figure, and calculate the exact position size for a trade with a stop twenty points away, then fifty points away. Write both numbers down and keep them where you can see them at the open.

Done with this lesson?

Mark it complete to log the rep and earn +40 XP. Progress saves to this browser.

Next: Surviving the open →All lessons
Go deeperRead the full lesson

Amateurs open a chart and ask how much they could make. Professionals open a chart and ask how much they will lose if they are wrong, because that is the only number they control. Entry is a guess. Risk is a decision.

Define the loss before the entry

Before a position exists, you should already know the price that proves the idea wrong, the dollar amount that costs, and whether that amount is acceptable today. If you cannot answer all three, there is no trade — there is a bet.

Position size is math, not mood

Fix the percentage of the account you are willing to risk on one idea — many process traders use one percent or less while learning. Then position size falls out of the distance to your invalidation point. Wider stop, smaller size. Tighter stop, larger size. Same dollar risk either way. Size stops being emotional the moment it becomes arithmetic.

The costly habits

  • Moving a stop further away because price is approaching it. That converts a planned small loss into an unplanned large one.
  • Adding to a loser to 'average down' without a pre-written plan to do so.
  • Sizing up after wins because you feel hot, or after losses to 'get it back.'
  • Trading without a stop at all because the position is small — small positions become large ones.

Notice that none of these are analysis failures. They are risk failures, and they are the reason most accounts do not make it to the point where their analysis could pay off.

Education only. Nothing in this lesson is a signal or a recommendation to trade. Trading involves substantial risk of loss.