Who it is for — Readers who want to turn a planned loss budget into a quantity they can check. Percentage risk connects risk per trade with stated reference capital, but it cannot guarantee that realised loss stays within the budget.
Percentage risk expresses the planned loss budget for one trade as a share of a declared denominator: current equity, allocated capital, or another base defined by the policy. It is not the probability of losing and it is not a certain cap on realised loss.
In simple terms — If the base is $10,000 and the policy selects 0.8%, the planned budget is $80. Position size must then be derived from the invalidation distance, point value, costs and instrument constraints. Gaps, slippage and order mechanics may produce a loss above $80.
Formula and denominator
For a percentage p and reference capital C:
planned monetary budget = C × p
This is an identity, not a recommendation. A policy must state what belongs in C, when it is updated, and whether separate limits apply to a portfolio, day, instrument or group of correlated positions. Current equity and initial capital produce different risk paths.
For a linear instrument, a simplified quantity estimate is:
quantity ≈ budget ÷ (stop distance × point value + estimated cost per unit)
Contract multipliers, account currency, minimum lots and non-linear payoffs may require different formulas. A stop sets a condition or activates an order; it does not guarantee the execution price.
Adaptation to capital
| Phase | Effect |
|---|---|
| Base updated in drawdown | The monetary budget falls if the percentage and other conditions remain unchanged |
| Base updated as equity grows | The monetary budget rises if the percentage and other conditions remain unchanged |
| Fixed base | The budget does not move automatically with equity |
Updating from current equity mechanically reduces the budget after a loss, but does not remove gaps, concentration, correlation, operational errors or changes in the outcome distribution.
Choosing the percentage
There is no universally correct percentage for either professionals or beginners. The choice depends at least on:
- tolerable loss and drawdown;
- the estimated outcome distribution and uncertainty in that estimate;
- trade frequency and overlapping positions;
- leverage, liquidity, gaps and instrument payoff;
- costs, account constraints and operating capacity;
- stress scenarios and reduction or suspension rules.
A run of losses is a scenario to measure, not an inevitable count that applies to every strategy. Historical tests and simulations remain conditional on their data, assumptions and observed regime.
Common mistake — Raising the percentage only to “recover” changes the policy during a drawdown and may amplify the next loss. Any change should be justified, bounded and tested.
Summary
- Definition: planned budget divided by stated reference capital.
- Implementation: invalidation → budget → costs → trade size.
- Limit: planned percentage and realised loss may diverge.
- Control: also evaluate risk of ruin and aggregate risk.
Bronze path — Risk module. Next: Drawdown. Index: Bronze path.