Last Update: August 2021

I have been getting a lot of questions on how much you should risk while trading. To help everyone out, I wanted to post a very popular allocation formula that I use.

Risk Management & Position Sizing Formula

NOTE: NUMERICAL VALUES ARE EXAMPLES ONLY

1. Never lose more than 2% of account in any one trade.
2. Never have more than 10% of account in any one trade.
3. Never have more than 70% of account in all trades.
4. If account is down 15%, stop, analyze, and refund.

You have to decide what percentage you are comfortable with as risk and make it uniform to the current account balance when planning and placing the trade.

For legal reasons, I put it like this:

• Consider not losing more than around 2% of total account in any one trade.
• Consider not having more than around 10% of total account in any one trade.
• Consider not having more than 50% of total account in all trades.

Position Sizing Example

If the stock drops to my exit area or stop-out point, one contract of my option will lose about, let’s say, $125.

• 2% of my total account would equal $500 (25k x 2%)
• Therefore, I can possibly do a maximum of four contracts. (4 x 125 = 500)
• The total to buy four contracts is $600 per contract x 4 contracts = $2400
• 10% of my account = 2500 (25k x 10%)
• Trade is $ 100 less than the max I want to put in each trade.

Again, for legal reasons, this is an example only, but very similar to what I use for accounts between 10k to 100k.

After these trades are placed, ask yourself:

• Do I have at least half or 70% of my account’s buying power left?
• If account Net Liquidity were to drop some percentage, do you stop trading?
• When should I start taking profit?

If I see a trade showing post-trade gains, I take at least a portion of the trade-off to realize the profit. For example:

• With $100 or more showing in profit and I have five contracts open, then I might take two to three contracts off, and adjust stops on rest.
• If you’re up 100%, you can take half off the table and have a risk-free trade.

Try to protect the break-even point as soon as possible.

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