Risk Management Formula Sheet

Formulas and example calculations for position sizing and risk. Use for quick revision and live trading.

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Core Formulas

1. Dollar Risk

Dollar Risk = Account Size × Risk%

Example: Account = $40,000, Risk = 1% Dollar Risk = $40,000 × 0.01 = $400

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2. Risk Per Unit (per share / per contract / per lot)

Stocks (per share):

Risk Per Share = |Entry Price − Stop Price|

Example: Entry = $50, Stop = $47 Risk Per Share = |50 − 47| = $3

Forex (per lot): Risk in points × pip value per lot = risk per lot. Example: 50 pips × $10/pip (standard) = $500 per standard lot.

Futures: Risk in points × point value = risk per contract. Example: 5 points × $20/point = $100 per contract.

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3. Position Size (units)

Position Size = Dollar Risk / Risk Per Unit

Stocks example: Dollar Risk = $400, Risk Per Share = $3 Shares = $400 / $3 = 133 shares (round down: 130)

Forex example: Dollar Risk = $400, Risk per 0.1 lot = $50 Lots = $400 / $50 = 0.8 lot (or 8 mini lots)

Futures example: Dollar Risk = $400, Risk per contract = $100 Contracts = $400 / $100 = 4 contracts

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Summary (Stocks)

Step	Formula
1. Dollar risk	Account × Risk%
2. Risk per share	|Entry − Stop|
3. Shares	Dollar risk / Risk per share

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Risk:Reward (R:R)

R:R = (Target − Entry) / (Entry − Stop)   for longs
R:R = (Entry − Target) / (Stop − Entry) for shorts

Example (long): Entry 100, Stop 97, Target 106 R:R = (106 − 100) / (100 − 97) = 6/3 = 2 (1:2)

Minimum: Aim for ≥ 1:1.5 or 1:2.

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Expectancy (per trade, in R)

If you risk 1R per trade:

Expectancy = (Win Rate × Avg Win in R) − (Loss Rate × Avg Loss in R)

With fixed 1R loss: Avg Loss in R = 1. So:

Expectancy = (Win Rate × Avg Win in R) − (1 − Win Rate)

Example: Win rate 50%, avg win 2R E = (0.5 × 2) − 0.5 = 0.5 R per trade (positive edge).

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Kelly Criterion (optional)

Full Kelly fraction:

f* = (p × b − q) / b

• p = win rate, q = 1 − p

• b = win/loss ratio (avg win / avg loss in same units)

Example: p = 0.5, b = 2 f* = (0.5 × 2 − 0.5) / 2 = 0.25 (25% of bankroll—too high in practice)

Use ¼ or ½ Kelly for lower volatility, or ignore and use fixed 0.5–2% risk per trade.

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Max Drawdown (rough)

No exact formula. With 1% risk and 50% win rate, expect strings of 5–10 losses. Rough guide: 10–20% drawdown over a year is common. Size so you can tolerate that.

Recovery: After a 20% drawdown, you need 25% return to break even (0.80 × 1.25 = 1.0).

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Quick Reference Table

Item	Formula or value
Risk per trade	0.5–2% (e.g. 1%)
Dollar risk	Account × Risk%
Position size	Dollar risk / Risk per unit
Min R:R	1:1.5 or 1:2
Expectancy	(Win% × Avg win R) − (Loss% × 1) > 0
Max daily loss	e.g. stop after 2%
Stop placement	Beyond structure/level (not arbitrary)

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Full detail: 08 — Risk Management.