The Mathematics of Risk of Ruin

Every professional trader knows that the most important metric isn't how much you make when you are right, but how much you lose when you are wrong. This is where Position Sizing comes in.

What is the 2% Rule?

The 2% rule suggests that a trader should never risk more than 2% of their available equity on a single trade. For example, if you have a $10,000 account, your maximum risk per trade should be $200.

This protects you against a string of consecutive losses (drawdown). Even with 10 losses in a row, you would still have over 80% of your capital intact, allowing you to fight another day.

Calculating Lot Size

The formula for position sizing is:

Doing this calculation manually before every trade is prone to error and slow. That is why we built the Position Size Calculator.