Risk management
The arithmetic of risk per trade
Why a 50% loss needs a 100% gain to recover, and what fixed-fraction sizing actually changes.
Losses and gains are not symmetrical. The deeper the loss, the larger the gain required to get back to where you started.
Recovery arithmetic
| Loss | Gain needed to recover |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 50% | 100% |
Why the recovery is larger
Start with a fictional 100. After a 20% loss, 80 remains. Recovering the original 20 requires a gain of 20 divided by 80: 25%. The calculation uses the smaller, remaining amount as its base. It does not mean that a 25% gain is achievable or likely.
Fixed-fraction sizing
A fixed-fraction approach expresses a planned risk budget as a percentage of the current account value. In a simplified same-currency, whole-unit example, planned price risk is the distance from entry to the stop multiplied by position size. Actual losses can differ because of execution, costs and product mechanics.
As a hypothetical stress test, ten consecutive losses at 1% risk per trade take about 9.6% off the account; at 2% about 18.3%; at 5% about 40.1%. The size of the position, not the confidence of the trader, changes how quickly this hypothetical drawdown accumulates. The calculation assumes each loss is exactly the chosen fraction of the remaining account, with no fees, deposits or withdrawals.
Try the numbers yourself with the risk calculator. This is an educational illustration, not a recommendation of any particular percentage.
One position is not the entire account
Several open positions can create exposure at the same time. A calculation for one idea does not capture their combined risk, relationships between instruments or the effect of a sudden gap. Nor does it decide what you can afford to lose.
A paper exercise
Begin with 1,000 imaginary units. Multiply the balance by 0.99 ten times and record the result after each step. Repeat with 0.98. Compare the amount lost on the first step with the amount on the tenth. The changing base is the point of the exercise.
Then change one calculator input at a time. Keep the account and budget fixed while changing the stop distance, and explain the resulting size in words. Continue with a wider stop changes more than the chart.
Further reading
CME Group: risk management and a trade plan.
Educational content only. Trading involves substantial risk of loss. See the full disclaimer.
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