Who it is for — Anyone preparing to open a position who needs to turn an invalidation idea into a monetary amount that can be compared with their capital.
Risk per trade is the planned loss between entry and the stop loss, for the selected quantity. It is often denoted 1R. It is a budget set before the order, not a maximum loss guaranteed by the market.
In simple terms — “If the idea is invalidated and the exit occurs as planned, this trade should cost me about $50.” The decisive word is about: the actual execution price may differ.
Calculating planned risk
In simple terms — First choose where the hypothesis is no longer valid; then measure the distance; finally adapt size to the budget. Moving a stop to accommodate a size chosen in advance reverses the process.
For a share or another linear instrument denominated in the account currency:
Planned risk = |entry − stop| × quantity + estimated costs
For futures, CFDs, foreign exchange or another linear contract, include the monetary value of a point or tick, any contract multiplier and currency conversion:
Planned risk = distance in ticks × tick value × contracts + estimated costs
| Step | Check |
|---|---|
| 1 | Define the level that invalidates the idea |
| 2 | Check how a stop is triggered and executed in the selected market |
| 3 | Calculate the loss per unit or contract |
| 4 | |
| 5 | Add commissions, spread, estimated slippage and rounding |
Example — Entry at $25.00, stop at $24.30 and 100 shares: the distance is $0.70. Planned price risk is $70, plus estimated costs. If the average exit occurs at $24.10, price loss is $90: the stop did not turn $70 into a guaranteed ceiling.
What 1R means
In simple terms — R normalises trades of different sizes. If initial planned risk was $50, a $100 result is +2R and a $65 loss is −1.3R.
The convention should remain consistent in the journal: initial R is the planned risk at entry. Partial exits, trailing stops and additions change the remaining risk, but should not retroactively rewrite the denominator used to compare trades.
R helps analyse the result distribution, average loss and expectancy without confusing outcome with monetary size. On its own, it does not show whether the chosen risk level is sustainable.
Why realised loss can exceed 1R
When triggered, a stop order may become a market order. In a fast market or after a gap, the received price can differ materially from the trigger; a stop-limit controls the limit price but may remain unfilled. Commissions, spread, slippage, financing and currency conversion can also increase the negative result.
Common mistake — Describing 1R as a “maximum loss.” It is an operating estimate based on size, stop and execution assumptions. With leverage, poor liquidity or gaps, loss can be larger and, under some product or margin terms, can exceed the capital initially committed.
There is no universally correct percentage for every trader. The budget should be considered alongside leverage, volatility, correlation among positions, a tolerable loss sequence and the portfolio-wide risk limit.
Summary
- 1R: initial planned risk, not an execution guarantee.
- Order: invalidation → unit risk → size → costs.
- Check: record both planned R and realised R.
Bronze path — Risk module. Next: Risk/reward ratio. Index: Bronze path.
Sources
- CME Group, Proper Position Size — logical stop, monetary or percentage budget, and sizing through tick distance and tick value.
- U.S. Securities and Exchange Commission, Investor.gov, Trading Basics, pp. 2–3 — how stop and stop-limit orders work; a stop price is not a guaranteed execution price.
- FINRA, Brokerage Accounts — margin accounts involve broker lending and losses may exceed the amount deposited.