risk
Position Sizing (% Risk)
The most important formula in trading. Determines how many contracts to trade based on your account size and maximum acceptable loss per trade.
Formula
Contracts = (Account × Risk%) / Max Loss per Contract
Variables
- Account
- Total account value ($)
- Risk%
- Maximum % of account to risk per trade (typically 1-5%)
- Max Loss
- Maximum loss per contract in dollars
- Contracts
- Number of contracts to trade (round down)
Worked Example
Inputs
- Account
- $50,000
- Risk%
- 2%
- Strategy
- $5-wide put spread @ $1.50 credit
Calculation Steps
- 1
Risk per trade = $50,000 × 0.02 = $1,000 - 2
Max loss per contract = ($5.00 - $1.50) × 100 = $350 - 3
Contracts = $1,000 / $350 = 2.86 - 4
Round down → 2 contracts
Result: 2 contracts — risking $700 (1.4% of account)
Intuition
Position sizing is the #1 predictor of long-term survival. A 50% drawdown requires a 100% gain to recover. Keep risk per trade at 1-3% of account. Even the best strategy will blow up with oversized positions.