Lesson 3: Risk Engine - Position Sizing, Stops, and R-Multiples

Learning outcomes: Protect capital, size every trade correctly, and measure performance in R.

Risk is the only part you control. If you control risk, you control survival and long-term compounding.

R-multiples let you compare trades without emotion. A win is only a win if it beats your risk.

Core concepts

• Fixed fractional risk (0.5 to 1.0 percent while learning).
• Position sizing = Risk / (Stop pips x pip value).
• Stops placed beyond invalidation, not inside the zone.
• ATR to validate stop distance.
• Expectancy = win rate x avg win - loss rate x avg loss.

Execution framework

1. Define your risk per trade.
2. Find the invalidation level and set the stop.
3. Compute position size using the formula.
4. Define the target in R (start with 1.5 to 2R).
5. Log the trade in R after it closes.

Annotated walkthrough

Example: GBPJPY with a 30 pip stop and 1 percent risk.

1. Risk 1 percent of account balance.
2. Stop is 30 pips beyond the invalidation level.
3. Size the trade so 30 pips equals 1 percent risk.
4. Target 2R to keep expectancy positive.

Common mistakes

• Moving stops to avoid a loss.
• Increasing size after a loss.
• Ignoring spread and slippage in your risk.
• Tracking P/L in dollars instead of R.

Checklist

• Risk percent defined.
• Stop beyond invalidation.
• Position size calculated.
• Target set in R.
• Max daily loss rule set.
• Trade logged with R outcome.

Practice drills

1. Calculate size for 5 different stop sizes.
2. Backfill 10 trades and compute average R.
3. Simulate a 5 loss streak to confirm risk tolerance.

Pro tips

• Consistency beats intensity.
• R-multiples remove emotional bias.
• Never let one trade decide your month.