Money Basics · Lesson 12 of 14
Write Down the Loss You Can Afford Before Considering a Trade
Decide your maximum affordable loss before you trade, size from it, and treat a losing streak as a reason to review rather than to bet bigger.
In this lesson
- Size a position from a maximum affordable loss
- Spot hidden concentration across several positions
- Set a stopping rule and keep a useful trade record
Position size is how much money you expose to one idea, and deciding it starts with the loss, not the reward. Consider that loss relative to your whole account and your essential needs. There’s no single risk percentage that suits everyone. A planned exit can fail, so consider a worse outcome as well.
Example Consider this example
In a hypothetical $5,000 account, a $50 loss is 1% of the account. Sizing works backward from that loss. For a hypothetical stock bought at $25 with a planned exit at $24, the planned loss is $1 per share, so 50 shares keep the plan near $50 before fees. A gap below $24 could still cost more. Buying one option for $200 instead puts four times that $50 at risk if it expires worthless, and a stop order doesn’t turn the $200 maximum premium loss into a locked-in $50 loss.
Even with favorable hypothetical odds, risking too much per trade raises your risk of ruin. Real win rates and payoffs are uncertain and change over time.
Count the real risk
Separate a maximum affordable loss from a hoped-for reward. Include fees and slippage, and check whether several positions depend on the same market move. Five technology trades can behave like one large bet, because their prices often move together.
When trades go wrong
A losing streak is a reason to review your process, not to double the next trade to recover quickly. That urge has a name: revenge trading. Set a stopping rule for the session. Avoid trading while distressed, rushed or unable to monitor a position that needs attention.
Keep a record
- What you expected to happen
- Why you entered
- How much you risked
- What actually happened
A trading journal makes patterns visible over time. A profitable mistake is still a mistake, and a well-planned loss doesn’t automatically mean the process was wrong.
Check your understanding
5 questions. Answer each one, then open “Show answer” to compare.
Question 1 of 5 Your account holds $8,000 and you decide to risk no more than 1% on one idea. What is your maximum planned loss?
dollarsShow answer
Answer: 80 dollars.
$8,000 × 1% = $80. One percent isn’t a universal rule. The point is to choose the loss first and size the position from it.
Show answer
Answer: C. Up to the full $250 premium
A stop is a trigger, not a promised exit. In a gap the option can trade far below your stop, and a bought option can lose its whole premium, here $250.
Show answer
Answer: B. They often move together, so they can act like one large bet
Related positions often share the same driver. When they move together, a single market move can hit all five at once.
Show answer
Answer: False.
Doubling up after losses raises the risk of ruin right when judgment is weakest. A losing streak calls for a review and, often, a pause.
Question 5 of 5 Your maximum planned loss is $80. You’re studying a hypothetical stock purchase at $40 with a planned exit at $38. How many shares keep the planned loss at $80, before fees?
sharesShow answer
Answer: 40 shares.
The planned loss per share is $40 − $38 = $2, and $80 ÷ $2 = 40 shares. A gap through $38 could still cost more, which is why the plan should consider a worse outcome.
Key takeaways
- Choose the loss you can afford first, then size the position from it.
- A stop is a trigger, not a promised exit. In a gap, a bought option can still lose its full premium.
- Related positions can behave like one large bet.
- Review a losing streak; don’t double up to recover.
Key terms
- Position size
- How many shares or contracts you trade. Many traders size so that reaching their invalidation loses a fixed small slice of the account.
- Risk of ruin
- The chance that a run of losses shrinks your account to a point where you can’t keep trading. Risking less per trade lowers it sharply.
- Revenge trading
- Taking impulsive, often larger trades to win back a recent loss. It abandons the plan right when judgment is weakest.
- Trading journal
- A record of each trade’s plan, entry, exit, result and what you were thinking. Reviewing it reveals patterns no single trade can show.
Sources and further reading
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Educational content, not investment advice. Lessons describe how markets and models tend to behave. They don’t tell anyone what to buy, sell or hold. Interactive examples use illustrative sample data, and simulator results are simulated — not actual trading. Options involve risk and are not suitable for all investors.
Risk disclosureCharacteristics and Risks of Standardized Options (OCC) (opens in a new tab)