Depending on your trading goals, the method in which you determine how much to risk per trade may differ. Generally, though, there are two main methods:
Percentage of Portfolio
This is by far the most commonly recommended methodology and is used widely by fund managers and professional traders. On each trade, you risk a fixed percentage of your account. As a rule of thumb for individual traders, the larger your account is, the fewer percentage points you’ll risk per trade. One percent of a $25,000 account is just $250, while one percent of a $1,000,000 account is $10,000. Most individual traders don’t desire to risk that much on a given trade and typically will reduce their risk-per-trade as their account grows.
Fixed Dollar Amount
For various reasons, some traders ‘cap out’ their account size, and don’t desire to continue rising their position sizes as their account grows. One reason might be due to the stressful trading psychology at play when risking a large amount like $5,000 or $10,000 on each trade. Another might be that the trader’s strategy might not be scalable, like trading OTC stocks, for example. This position sizing methodology might also be applied by losing traders who have a regular paycheck and can keep adding to their account as their losses pile up.
These traders tend to implement a fixed dollar amount of risk per trade. Based on their goals, they’ve identified a dollar amount they’re comfortable with losing on a given trade.