Free lessons › Risk Management & Position Sizing › The Math of Risk

Risk per trade — the 1R framework

Why pros size in R, not dollars.

9 min · Beginner · Free lesson

What you'll learn

  • Define 1R as the dollar amount you lose if your stop is hit
  • Convert any trade result from dollars into an R-multiple
  • Explain why capping risk at 1% per trade protects the account through losing streaks

The idea

Before you ask "how much can I make?", ask "how much can I lose if I am wrong?" That amount is your risk, and we call it 1R.

1R is the dollar loss you take if price hits your stop. If your stop is $0.50 away and you hold 200 shares, 1R is $100. Every result is then measured in R. Make $250 on that trade and you made +2.5R. Get stopped out and you lost -1R.

Why bother? Because dollars lie. A $300 win sounds great until you learn the trader risked $1,000 to get it. R tells the truth: that was +0.3R. Thinking in R lets you compare a $5 stock with a $500 stock, a small account with a large one, and this month with last month, all on one scale.

Think of R like a unit of fuel in a car. Every trade burns one unit if it fails. Your job is to know exactly how many units you have and to never burn more than one per trip.

How it works

  1. Set your 1R in dollars. Biggainers rule: 1R is at most 1% of your account. A $10,000 account has a 1R of $100 or less. You can risk less. You never risk more.
  2. Define the stop before entry. Your stop comes from the chart: the price where your idea is proven wrong. The stop is not chosen to fit a dollar amount.
  3. Size the position so the stop costs 1R. Shares = 1R / (entry - stop). The next lesson covers this in full.
  4. Record every result in R. R-multiple = profit or loss in dollars / 1R in dollars.
  5. Count slippage honestly. If you planned -1R but got filled worse and lost -1.2R, log -1.2R.

Why 1%? Because losing streaks are normal, even with a solid process. Ten losses in a row at 1% risk each (compounded) leave you down about 9.6%. You need a gain of about 10.6% to get back. The same ten losses at 5% risk each leave you down about 40.1%, and you need about +67% just to break even. One is a bad week. The other can end a trading career.

Worked example

Hypothetical account: $10,000. 1R = 1% = $100.

Trade 1 (stock long). Buy XYZ at $50.00, stop $49.50. Risk per share is $0.50. Shares = $100 / $0.50 = 200.

  • Exit at $51.25: profit = 200 x $1.25 = $250. R-multiple = $250 / $100 = +2.5R.
  • Exit at the stop, $49.50: loss = 200 x $0.50 = $100 = -1R.
  • Stop slips and fills at $49.40: loss = 200 x $0.60 = $120 = -1.2R. Log it as -1.2R, not -1R.

Trade 2 (option long). Buy one call on a hypothetical stock at $2.50. One contract controls 100 shares, so it costs $2.50 x 100 = $250. Your plan is to exit if the option falls to $1.50.

  • Risk per contract = ($2.50 - $1.50) x 100 = $100 = 1R.
  • If you would hold to expiration with no stop, your true risk is the full $250 premium, which is 2.5R. That is over the limit for this account, so you would not take that version.

Comparing two traders. Trader A made $600 this week and Trader B made $300. Sounds like A is better. But A risks $400 per trade, so $600 is +1.5R. B risks $50 per trade, so $300 is +6R. B's process produced four times more per unit of risk.

Common mistakes

  • Choosing a stop to fit a dollar amount — a stop placed for convenience is not where the idea is wrong, so it gets hit by noise — pick the stop from the chart, then size the shares.
  • Risking a different amount every trade — a big loss on your largest trade can erase ten small wins — keep 1R constant for a stretch of trades.
  • Ignoring slippage and fees in R — your journal looks better than your account — log the actual fill.
  • Treating an option's full premium as "not risk" — if you have no stop on an option, the whole premium is at risk — size on the premium you can actually lose.

Checklist

  • Do I know my 1R in dollars today, and is it 1% of my account or less?
  • Did I pick the stop from the chart before sizing?
  • Does hitting my stop cost 1R or less?
  • For options, am I sizing on premium x 100 at risk?
  • Will I log the result in R, including slippage?

Practice: Convert your last 10 trades to R

  1. Open your Trade Journal (or Paper Sim history) and list your last 10 trades with entry, stop, size and dollar result.
  2. For each trade, calculate the planned 1R: shares x (entry - stop), or premium at risk x 100 for options.
  3. Divide each dollar result by that trade's 1R to get the R-multiple, including slippage.
  4. Flag any trade where 1R was more than 1% of your account at the time.
  5. Ask the AI Coach to summarize your average win and average loss in R.

Key takeaways

  • 1R is the dollar amount you lose if your stop is hit, capped at 1% of your account.
  • R-multiple = dollar profit or loss / dollar risk; it lets you compare every trade on one scale.
  • Ten straight 1% losses cost about 9.6%; ten straight 5% losses cost about 40%.
  • Choose the stop from the chart first, then size the position so that stop equals 1R.
  • For options, risk is the premium you can lose times 100 per contract.

Glossary

  • 1R — The dollar amount you lose if a trade hits its stop; your unit of risk, capped at 1% of the account.
  • R-multiple — A trade's profit or loss divided by its 1R, such as +2.5R or -1R.
  • Slippage — The difference between your planned exit or entry price and the actual fill.

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