Risk Management 101: Position Sizing for Consistent Profitability

You can have a 70% win rate and still blow up your account. Conversely, you can have a 40% win rate and be consistently profitable. The difference? Risk management and position sizing.

This isn't the exciting part of trading. Nobody makes YouTube videos about calculating position size. But this is what separates traders who last from those who don't.

The 1-2% Rule

The foundational principle of position sizing is simple: never risk more than 1-2% of your account on any single trade. This isn't a suggestion—it's survival math.

Here's why: Even with a 60% win rate, you will have losing streaks. A 5-trade losing streak happens about 1% of the time. An 8-trade losing streak happens about 0.1% of the time. Trade long enough, and you'll experience both.

If you're risking 10% per trade and hit an 8-trade losing streak, you've lost 80% of your account. If you're risking 1% per trade, you've lost 8%. One is recoverable. The other probably isn't.

Calculating Position Size

Here's the formula:

Notice that position size changes based on the trade setup. A wider stop means fewer contracts. A tighter stop means more contracts. But the dollar risk stays constant.

Risk Per Trade vs. Risk Per Day

Individual trade risk is one layer. Daily risk limits add another layer of protection:

• Per-trade risk: 1-2% of account
• Daily risk limit: 3-5% of account
• Weekly risk limit: 10% of account

When you hit your daily limit, you're done for the day. No exceptions. This prevents revenge trading and emotional spirals from turning a bad day into a catastrophic one.

The Math of Recovery

Here's a sobering reality that every trader should internalize:

• Lose 10% → Need 11% to recover
• Lose 20% → Need 25% to recover
• Lose 30% → Need 43% to recover
• Lose 50% → Need 100% to recover

The relationship between loss and required recovery isn't linear—it's exponential. A 50% drawdown requires you to double your remaining capital just to get back to breakeven. This is why capital preservation matters more than any single trade.

Scaling Position Size

As your account grows, your position size grows proportionally. This is one of the beautiful aspects of percentage-based risk management—it scales automatically.

However, there's a psychological component. Trading 1 contract is different from trading 10 contracts, even if the percentage risk is identical. Consider these guidelines:

• New strategy: Start at 0.5% risk until you have 20+ trades of live data
• Proven strategy: Scale to 1% risk
• Highly confident setups: Scale to 1.5-2% maximum
• Never exceed 2%: No trade is "certain enough" to justify more

Common Position Sizing Mistakes

• Fixed contract size: Trading 2 contracts regardless of setup risk
• Increasing size after losses: Trying to recover quickly
• Decreasing size after wins: Getting conservative when it's working
• Ignoring stop distance: Same size whether stop is 5 or 50 points away
• Emotional sizing: "This one looks really good" leading to oversized position

Implementing With VLM

VLM provides clear entry and stop levels for each signal. Use these levels to calculate your position size before entering:

1. Note the VLM signal entry level
2. Identify the invalidation level (your stop)
3. Calculate the point/tick distance
4. Apply the position sizing formula
5. Enter with the calculated size—no more, no less