Risk management is the process of controlling how much capital is exposed to each trade.
Why risk matters
A strategy can be profitable over many trades and still experience losing streaks. Position sizing helps ensure that a losing streak does not eliminate the account.
Risk Management Without Blindly Following the 1% Rule
Many traders are told to risk only 1% of their account on each trade.
It is a useful starting point, but it is not a complete risk-management system.
The problem is that traders often follow the rule mechanically:
“My account is $10,000, so I can risk $100. My account is now $11,000, so I can risk $110.”
That may be mathematically correct, but it does not necessarily make sense for the trader, the strategy, or the current market conditions.
A more flexible approach is to use a structured position-sizing method that increases exposure gradually as trading profits build. One method that does this is Ryan Jones’s Fixed Ratio approach, described in his book The Trading Game.
The idea is simple:
Do not increase your position just because your account has grown slightly. Increase it only after you have built a meaningful profit cushion.
Fixed Ratio sizing should be used alongside a stop-loss and a maximum-loss rule. It should not replace them.
Start with the basic question: how much could this trade lose?
Before deciding how many units to trade, decide where the trade is invalidated.
For example:
- Your account is $10,000.
- You decide that $100 is the maximum you are willing to lose on one trade.
- You plan to buy at $25.00.
- Your stop-loss will be at $24.75.
- The risk per unit is therefore $0.25.
If you trade 400 units, your planned loss is:
400 units * $0.25 = $100
So, if the stop is reached, the planned loss is $100.
This process can be used with whole or fractional units:
- Decide where the stop belongs.
- Decide the maximum amount you are willing to lose.
- Calculate the risk per unit.
- Choose a position size that keeps the possible loss below your limit.
If the market moves quickly and your entry price changes, recalculate the position size. The original calculation may no longer be valid.
Why not simply increase size after every winning trade?
Suppose you start with 400 units and make a $300 profit.
A fixed-percentage system may immediately suggest increasing your next position. But one profitable trade does not necessarily mean that your strategy has suddenly become more reliable.
You might have:
- benefited from an unusually favorable market;
- taken a trade that worked despite imperfect execution;
- experienced a temporary change in volatility;
- increased your exposure before building a sufficient profit cushion.
Fixed Ratio sizing takes a slower approach. You increase your position only after accumulating a defined amount of profit.
Fixed Ratio explained with a simple example
Imagine that you begin trading with 400 units.
You choose a profit step, or delta, of $1,000.
This means that you require a certain amount of accumulated profit before increasing your position.
A simplified progression might look like this:
| Accumulated closed profit | Maximum position |
|---|---|
| Below $1,000 | 400 units |
| $1,000 or more | 800 units |
| $3,000 or more | 1,200 units |
| $6,000 or more | 1,600 units |
| $10,000 or more | 2,000 units |
The thresholds become larger as the position grows. This is intentional.
Moving from 400 units to 800 units requires $1,000 of profit. Moving from 1,600 units to 2,000 units requires another $4,000.
The more exposure you want to add, the more profit you must build first.
This prevents position size from growing too quickly.
A practical trading example
Assume a trader uses the following plan:
- Starting position: 400 units
- First increase: 800 units after $1,000 of closed profit
- Second increase: 1,200 units after $3,000 of closed profit
- Maximum planned loss per trade: $100
The trader has now accumulated $1,200 in closed profit. The Fixed Ratio plan allows a position of up to 800 units.
A new setup appears:
- Entry price: $25.00
- Stop-loss: $24.90
- Risk per unit: $0.10
If the trader uses 800 units, the planned loss is:
800 units * $0.10 = $80
This is below the $100 maximum, so the position is acceptable.
Now consider a different setup:
- Entry price: $25.00
- Stop-loss: $24.80
- Risk per unit: $0.20
Trading 800 units would risk:
800 * $0.20 = $160
That is above the $100 maximum.
The trader should reduce the position to 500 units:
500 * $0.20 = $100
Although the Fixed Ratio plan permits up to 800 units, the stop-loss calculation limits the actual position to 500 units.
This is the central rule:
Fixed Ratio determines the maximum position tier. The stop-loss determines whether that position is suitable for the current trade.
What if the entry price changes?
Fast markets can make a carefully planned trade unsuitable within seconds.
Suppose you plan to:
- buy at $25.00;
- place your stop at $24.75;
- risk $100;
- trade 400 units.
The risk per unit is $0.25:
400 * $0.25 = $100
But the market moves quickly, and you are filled at $25.10 instead. If the stop remains at $24.75, the risk per unit is now $0.35.
If you still trade 400 units, your possible loss becomes:
400 * $0.35 = $140
You are now risking more than planned.
To keep the risk near $100, reduce the position to approximately 285 units:
$100/$0.35 approx. 285 units
If your platform allows fractional units, you could use 285.71 units. If it only allows whole units, round down to 285.
A simple rule is:
If the entry changes, the stop changes, or market conditions become unusually volatile, recalculate before entering.
If there is no time to recalculate, reduce the size or skip the trade. Missing a trade is preferable to entering with unknown risk.
A quick position-sizing table
You do not need to perform a long calculation while the market is moving quickly. Prepare a table before trading begins.
Assume the maximum loss per trade is $100:
| Risk per unit | Maximum position |
|---|---|
| $0.05 | 2,000 units |
| $0.10 | 1,000 units |
| $0.20 | 500 units |
| $0.25 | 400 units |
| $0.50 | 200 units |
To calculate the maximum position:
Maximum units = Maximum trade risk ÷ Risk per unit
For example:
- Maximum trade risk: $100
- Risk per unit: $0.20
Calculation:
$100 ÷ $0.20 = 500 units
The maximum position is therefore 500 units.
If the Fixed Ratio tier allows 800 units, the final position is still limited to 500 units because of the trade-risk cap.
The smaller number always wins
Before entering a trade, compare two numbers:
- The maximum position permitted by your Fixed Ratio plan.
- The maximum position permitted by your trade-risk limit.
For example:
- Fixed Ratio maximum: 800 units
- Maximum position based on the stop: 500 units
The correct position is 500 units.
Another example:
- Fixed Ratio maximum: 400 units
- Maximum position based on the stop: 1,000 units
The correct position is 400 units.
The Fixed Ratio limit still applies, even though the stop-based calculation would allow more.
The rule is:
Use the smaller of the Fixed Ratio position and the stop-based position.
What happens after a losing streak?
Fixed Ratio sizing can also reduce exposure after losses.
Suppose you have accumulated enough profit to trade 1,200 units. You then experience a series of losing trades and give back part of that profit.
If your closed profit falls below the level required for 1,200 units, you return to 800 units.
This can feel frustrating, but it is the purpose of the method. When trading performance deteriorates, exposure is reduced.
Use closed results:
- profits that have actually been realized;
- losses that have actually been realized;
- not temporary profits on open trades.
Do not continue using a higher position simply because you reached that level in the past.
A quick decision checklist
Before entering a trade, ask:
- Where is my stop-loss?
- How much does each unit risk if the stop is reached?
- What position does my Fixed Ratio table allow?
- What position does my maximum-loss rule allow?
- Which of those two numbers is smaller?
- Has the entry price moved?
- Is the market moving too quickly for the original calculation to remain valid?
- Do I already have another position exposed to the same market or a closely related market?
If you cannot answer these questions quickly, prepare the calculations before the trading session. Keep your position-size table beside your trading platform.
The most common mistake
The biggest mistake is confusing being allowed to trade a larger position with being required to trade a larger position.
If your Fixed Ratio plan says you may trade 1,200 units, that does not mean every trade should use 1,200 units.
You may still choose to trade:
- 400 units because the setup is less reliable;
- 800 units because volatility is elevated;
- a smaller position because another correlated trade is already open;
- no position because the entry moved too far.
Position sizing should respond to the actual risk of the trade—not simply to the account balance or the highest permitted tier.
The practical rule
A simple version of the complete method is:
Increase your maximum position only after building a defined amount of closed profit. For every individual trade, use a stop-loss and never risk more than your predetermined limit.
This gives you two forms of protection:
- Fixed Ratio controls how quickly your position size grows.
- The maximum-loss rule controls how much the current trade can lose.
The 1% or 2% rule can still be used as a reference. However, it does not need to be followed blindly on every trade.
The goal is not to use the largest position available. The goal is to keep risk controlled while allowing position size to increase gradually when your trading results justify it.
Trading leveraged products involves substantial risk. Position-sizing methods do not guarantee profits or prevent losses. Test any approach in a simulator or with very small size before applying it to live trading.