How Much Capital to Risk on Each Stock Market Day Trade

And How to Control Risk

How to much capital to risk per trade and why
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No matter how much research is done, or how selective we are about our trades, a lot of them are going to be losers. It's for this reason we need to control risk on every trade. Before we take a trade we can't know if it is going to be a winner or loser (otherwise, obviously we would avoid the losers). A loss can easily get out of hand if not controlled. Volatile stocks can erase a significant portion of a trading account in minutes, especially if leveraged. To avoid this, cap the risk on each trade.

Here's how to do it.

How Much Capital to Risk on Each Trade

How much capital you risk depends on your account size, but as a general rule, don't risk more than 1 percent of your account on a trade. That means, don't lose more than 1 percent of your account on a single trade.

If you have a $30,000 account, you can lose up to $300 per trade, but you can still utilize all your capital. For example, if you buy 1,000 shares of a $29 stock you used up most ($29,000) of your buying power, but as long as you don't lose more than $300, your risk is less than 1 percent.

Many new traders think that risking 1 percent means they can only utilize 1 percent of their capital in a trade; that's not true. Most day traders utilize a significant portion of their capital, or even utilize more capital than they have (via leverage), on every trade.

Trade Risk Variations

Some traders are willing to risk up to 2 percent of their account. This is typical if the account is smaller, and the trader is willing to risk more in order to make more off of the smaller account. In the stock market you are required to have $25,000 to day trade (there are a few alternatives); if you risk 1 percent you can lose up to $250 on a trade—that should be more than enough. If risking 2 percent, you can risk up to $500.

With a large account, set a fixed dollar risk which is less 1 percent. For example, if you have a $500,000 account you can risk up to $5000 per trade, but you don't need to risk 1 percent if you don't want to. Risking $1000, or even $100 per trade can provide an excellent living. If you have a large account and don't want to risk 1 percent, pick a dollar amount which is less than 1 percent and stick with it. As long as you are making an income you are happy with, that's all that matters. Don't take on more risk than you need to.

Making Sure Your Trades Don't Exceed the Risk Limit

Now you know how much you should be risking per trade, based on your account size. For most stock market day traders risking 1 percent or less is ideal.

Now you need to make sure you actually adhere to that risk limit. If you have a $30,000 account, you can risk $300. The easiest way to make sure you don't lose more than $300 is to use a stop loss order. A stop loss order gets you out of a trade when the price moves against you and reaches a certain pre-set price.

Here's an example. Let's say you buy a stock at $14. It looks like it could rally to $14.50, but may fluctuate a bit before it does. The price recently bounced off of $13.80, so you place a stop loss just below this small support level, at $13.78. The distance between your entry price and stop loss is $0.22.

You can risk up to $300, so divide $300 by $0.22 and you get 1,363, which is how many shares you can buy. If you buy 1,363 shares (round down to 1,300 ideally), and lose $0.22 on those shares, you've lost $299.86. Which is pretty close your maximum loss of $300.

Buying those shares cost $14 x 1363 = $19,082, so a significant portion of the available funds was used to make the trade, yet less than 1 percent is actually at risk.

Risking 1 percent or less is also a good idea because occasionally we'll end up losing more than we bargained for on a trade. While we set a stop loss order, we could incur slippage, resulting in a loss of more than 1 percent. Typically slippage is minimal, assuming you avoid trading right around major news events and trade stocks with lots of volume.

Final Word on Trade Risk

If you open an account with more than the required $25,000 for day trading stocks, risking 1 percent per trade is plenty. Assuming you win about 50 percent of your trades (or more) and can make 1.5 to 2 percent on your winners and keep your losses to 1 percent or less (of account capital), you'll make a good income. This may sound easy, but it requires a solid and well-practiced method for day trading stocks.​

Risking 2 percent is unnecessary, and is the most a stock trader should risk on a single trade. Occasionally we will end up taking a bigger loss than we expect, so the smaller the original risk the better. To properly cap your risk, set a stop loss and then calculate how many shares you can take to keep risk below 1 percent. In this way, each trade is perfectly calibrated to the trade and account size. Risk is controlled, yet it still allows for a good income.