Position Sizing and Stop Losses

You do not put on a seatbelt because you plan to crash. You put it on because you cannot know which trip will go wrong. Position sizing and stop losses are your seatbelt in trading. They feel unnecessary on the good days, and they are the only thing that matters on the bad ones.

Why size matters more than entries

Beginners spend most of their time hunting for the perfect entry. Experienced traders spend more time on a less exciting question: how much should I risk on this trade?

Here is why. Every trader has losing streaks. Look at what ten losses in a row do to an account, depending on how much is risked each time:

Risk per trade	Account after 10 straight losses
1%	down about 10%
2%	down about 18%
5%	down about 40%
10%	down about 65%

And losses are harder to recover from than they look:

If you lose	You need this gain to get back to even
10%	11%
25%	33%
50%	100%
75%	300%

A trader risking 1% can survive a terrible month and keep learning. A trader risking 10% may not get a second chance.

The 1-2% rule

The 1-2% rule says: never risk more than 1% to 2% of your account on a single trade. Beginners should stay at 1% or less.

"Risk" here does not mean the size of your position. It means how much money you lose if your stop loss is hit. You can buy $1,000 worth of stock and only risk $50, as you will see below.