In this lesson
- recap how to calculate position size
- learn to measure every trade in R-multiples
- see why a big drawdown is so hard to recover
In the first course you met the 1% rule and the formula for position size. Now we turn it into a common language for all your trades. Instead of "I made 15 euros" you will say "I made 2R" – and it will be clear right away whether it was a good trade.
Position size: a reminder#
Position size = the amount you want to risk ÷ the distance to the stop-loss.
Account of 2,000 euros, 1% risk = 20 euros. You buy Bitcoin at 60,000 with the stop-loss at 57,000 – that is 5% below the purchase. Position size = 20 euros ÷ 5% = 400 euros. If the price falls to the stop-loss, you lose roughly 20 euros (a bit more in a fast market).
Notice: position size is not set by how much you "believe in it". It is set by the risk and the distance to the stop-loss.
R: the unit of risk#
The amount you risk in a trade is 1R. In the example above 1R = 20 euros. You then express every result as a multiple of R – this is called an R-multiple:
| Trade result | In euros | In R |
|---|---|---|
| Price fell to the stop-loss | −20 € | −1R |
| Sold at 66,000 (target) | +40 € | +2R |
| Sold early, at 61,500 | +10 € | +0.5R |
| Stop-loss skipped in a crash | −26 € | −1.3R |
Why is this useful? R works the same with an account of 1,000 or 100,000 euros and shows right away whether the plan is being followed. A −1R loss is fine – it is the price of the trade. A −3R loss means something failed: there was no stop-loss, or you did not stick to it.
Why small risk#
Ten losing trades in a row sounds extreme. In reality it happens more often than you would think (more in the next lesson). How much of the account is left after them?
| Risk per trade | After 10 losses in a row |
|---|---|
| 1% | −9.6% |
| 2% | −18.3% |
| 5% | −40.1% |
| 10% | −65.1% |
And a drop is harder to recover than to suffer. Such a decline is called a drawdown, and the maths is merciless:
- after a 10% drop you need +11% to get back,
- after a 25% drop you need +33%,
- after a 50% drop you need +100%.
You choose the risk, not the market
You have no control over the outcome of a single trade. You do control how much you risk in it. Small risk per trade is the only thing that reliably keeps you in the game long enough to learn something.
Common myths#
- "I believe in this trade, I will put in more." There is no certainty in trading. Risk sets the size.
- "I will move the stop-loss further away so I do not get thrown out." Then you have to shrink the position, otherwise you risk more than 1R.
- "A 50% loss can be made back with a few good trades." You need to double what is left.
Summary
- Position size = the amount at risk ÷ the distance to the stop-loss.
- 1R is the amount you risk in a trade; measure results in R-multiples.
- A −1R loss is the plan; a loss worse than −1R is a mistake or a fast market.
- A drawdown is harder to recover than to suffer – hence small risk per trade.