Decide your risk before the trade

Every trade has a number attached to it before you click buy or sell. It is the most you are willing to lose if the trade goes wrong. If you don't pick that number ahead of time, the market will pick it for you.

Most people who day trade lose money, and many large losses start the same way. A trader enters without a plan for the exit, the trade moves against them, and they hope. This lesson is about making that decision while you are calm.

Pick your maximum loss first

Your risk per trade is the dollar amount you lose if your stop is hit. You decide it before entry, and you write it down. Once the trade is on, your job is to follow the plan, not to rethink it.

Here is a small example. Say you trade one MNQ contract, which moves $2 for each point. A 20-point stop on one MNQ contract is $40. If your plan says you will risk $40 on this trade, the stop and the size already agree. You know your worst case before the trade starts.

Costs come on top of that number. Commissions, fees and slippage on the stop can make the real loss a little bigger. It helps to leave room for them in your plan.

Fixed dollars or a percent of the account

There are two common ways to set the number. Both work, as long as you choose one and stick to it.

• Fixed dollar amount. You risk the same amount on every trade, such as $50. It is simple, and it is easy to compare one trade to another.
• Percent of the account. You risk a set share of your balance, such as 1%. On a $5,000 account, 1% is $50. If the account drops to $4,000, 1% becomes $40, so your risk shrinks as you lose.

You will often see 1% or 2% suggested as a starting point. Those are rules of thumb, not research findings. The right number is one where a string of losses would not change how you behave on the next trade. If a single loss would make you angry or scared, the number is too big.

Why I use the same size every signal

My own rule is simple. I trade the same size on every signal, with no exceptions for trades that "look better." I don't add size after a win, and I don't add size to get back a loss.

The main reason is that it makes the record readable. When every trade is the same size, the results in points tell you how the setup performed. If you trade three contracts on some days and one on others, one big day can hide a lot of weak ones. You stop learning about the setup and start learning about your mood.

Same size also takes away a decision in the moment. Fewer decisions under pressure means fewer chances to break a rule. My posted record at the record is simulated and in points, and fixed size is part of what makes it useful.

The takeaway

Decide the most you will lose on each trade before you enter. Use a fixed dollar amount or a percent of your account, and keep it small enough that a loss won't change your next decision. Trading the same size every time keeps your results honest and easy to judge.

Do this today

• Write down your maximum loss per trade in dollars before your next session.
• Choose fixed dollars or a percent of your account, and write down why.
• For your usual stop size, work out the dollar loss on one contract.
• Commit to one size for your next ten trades, win or lose.

Check yourself

Answer each one in your head, then open it to check.