01Think in R
R is the amount you lose if your stop is hit. If you risk $500, then 1R = $500, a $1,500 winner is +3R and a full stop-out is −1R. Measuring in R lets you compare trades, strategies and markets on one scale.
02Position sizing: the one formula that matters
Example: a $50,000 account risking 1% has $500 to lose. A 25-point stop on NQ ($20 per point) risks $500 per contract → 1 contract. The same stop on MNQ ($2 per point) risks $50 per contract → 10 contracts. Micros exist precisely so smaller accounts can size correctly.
Professionals decide the stop first (where the idea is wrong), then let the formula decide size. Never pick a size and then place the stop wherever the dollars run out.
03Win rate and payoff work together
| Reward : risk | Breakeven win rate | Expectancy at 40% |
|---|---|---|
| 1 : 1 | 50.0% | -0.20R |
| 1 : 1.5 | 40.0% | +0.00R |
| 1 : 2 | 33.3% | +0.20R |
| 1 : 3 | 25.0% | +0.60R |
| 1 : 4 | 20.0% | +1.00R |
A 40% win rate with 2R winners has expectancy 0.4 × 2 − 0.6 × 1 = +0.2R per trade. Over 100 trades at $500 risk that is +$10,000. A 70% win rate with 0.4R winners and 1R losers is −0.02R — busy, popular and slowly broke.
04Drawdowns are asymmetric
| Loss | Gain needed to recover |
|---|---|
| −10% | +11.1% |
| −20% | +25.0% |
| −30% | +42.9% |
| −50% | +100% |
| −75% | +300% |
A system that wins 40% of the time will hit 8 losses in a row roughly once every 150 trades — several times a year for an active trader. At 5% risk per trade that streak is a −34% drawdown; at 1% it is −8%. Size so that the losing streak you will certainly meet cannot end your career.
- 1R = the money you lose if the stop is hit.
- Size = (account × risk %) ÷ (stop distance × value per point).
- Breakeven win rate = 1 ÷ (1 + reward:risk).
- Expectancy, not win rate, decides profitability.
- Keep risk at 0.25–1% so normal losing streaks are survivable.
- Sizing by gut feel or by how confident you are
- Chasing high win rates with tiny targets and big stops
- Risking more after losses to win it back
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