How it works
Fixed-percentage risk is the most common rule: risk no more than X percent of account equity per trade. With a defined stop distance, position size = (account × risk percent) / stop distance. Two trades on the same setup but different stop distances get very different position sizes; the dollar risk stays constant. Strategies with higher win rates and asymmetric payoff can tolerate larger risk per trade.
Example
Account: $50,000. Risk per trade: 1 percent = $500. Trade idea: long EUR/USD with entry at 1.0850, stop at 1.0830 (20 pips of risk). Position size = $500 / 20 pips. Each pip must be worth $25, which on EUR/USD means 2.5 standard lots (250,000 euros). If your broker offers leverage allowing that, you take the trade. If the stop is wider at 50 pips, the same $500 risk gets you only 1 lot. Distance to stop drives the math.
Why it matters
Account blow-ups almost never come from a single bad trade. They come from too-large positions taken too often. Fixed percentage risk caps the damage of any losing streak at a survivable level: a 1 percent risk strategy survives 20 consecutive losses with 82 percent of capital intact. The same strategy at 5 percent risk per trade leaves 36 percent. Position size is the only variable you fully control.
