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Intermediate · Lesson 9 of 9Risk management and building a trading system
Professional traders focus on risk first. A common rule is to risk no more than 1-2% of the account on any single trade: position size = (account x risk %) / (entry price - stop price).
A trading system has clear rules for entry, exit, stop-loss, position size and which markets to trade. Test the rules on past data (backtesting), then on paper (Vestora Paper trading), before using real money. Beware overfitting: a rule tuned perfectly to the past often fails in the future.
Track expectancy: (win rate x average win) - (loss rate x average loss). A system that wins only 40% of the time can be profitable if winners are much larger than losers. Keep a journal (Vestora Journal) to learn from every trade.
Formula
Shares = (Account x Risk%) / (Entry - Stop) Expectancy = W x AvgWin - (1 - W) x AvgLoss
Key takeaways
- Risk 1-2% of capital per trade.
- Backtest, paper trade, then trade small.
- Expectancy, not win rate, decides profitability.
Check your understanding
1. Account $50,000, risk 1%, entry $20, stop $18. Position size?
- 250 shares
- 500 shares
- 1,000 shares
- 2,500 shares
Show the answer
250 shares. Risk $500 / $2 per share = 250 shares.
2. Win rate 40%, average win $300, average loss $100. Expectancy per trade?
- -$20
- $60
- $120
- $180
Show the answer
$60. 0.4 x 300 - 0.6 x 100 = 120 - 60 = $60.
Go deeper
- Wikipedia: Position sizing
- YouTube videos: trading risk management position sizing expectancy
- Investopedia: position sizing
- Wikipedia: Backtesting
- Wikipedia: Overfitting
Practise this in Vestora
Look up real shares, test ideas with paper trading, and track your progress through the course.
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