Trading · Medium · 13 min lesson
Trading practitioner: building a rules-based plan, risk per trade and position sizing
Trading Academy L2, chapter T2.1. Educational only, not investment advice. ESMA retail CFD measures (March 2018); MetaTrader 5 trading concepts; demo accounts only
What you will learn
- Write a rules-based plan with entry, stop, target and exit rules that another person could test.
- Set risk per trade as a fixed fraction of equity and calculate position size from the stop distance.
- Use expectancy, open risk limits and ESMA leverage context to spot a plan that fails.
Key takeaways
- A rules-based plan is written in measurable terms so another person could take the same decision and test it.
- Risk per trade is a fixed fraction of equity, and position size equals risk amount divided by the loss per lot at the stop.
- The stop comes from the setup; widening it without cutting the size silently raises the risk.
- Expectancy combines win rate with the size of wins and losses, in R, after costs.
- Open risk caps, correlation and daily loss limits protect the account; ESMA leverage limits do not replace them. Education only, not advice.
Free practice question
Mira's plan reads: 'Buy EURUSD when it looks strong, get out when the move feels tired, and risk a sensible amount.' She says she has a plan and does not need rules.
What is the most serious weakness of this plan?
The entry and exit words are opinions, so another person could not take the same decisions or test the plan.
Correct. Lesson section on testable rules: a plan must use measurable conditions so decisions can be reproduced and reviewed.
The plan uses a demo account instead of a live one.
Not quite. A demo account is the right place to practise, as the risk statement section of this lesson explains.
The plan is written down, which makes it inflexible.
Not quite. Writing the plan is the first requirement in the plan outline section, not a weakness.
The plan names only one market.
Not quite. Focusing on one market is acceptable in the plan outline section; the real defect is the unmeasurable wording of entry and exit.
Key terms
- R multiple: A result expressed as a multiple of the planned risk on the trade; a stopped trade is minus 1R.
- risk per trade: The amount you agree to lose if the stop is hit, written as a fraction of account equity.
- position size: The number of lots or units, calculated as risk amount divided by the loss per lot at the stop.
- stop loss: An order that closes the position automatically when the set level is reached (MetaTrader 5 Help).
- expectancy: Average result per trade: win rate times average win minus loss rate times average loss.
- open risk: The sum of the planned risk of all open positions, with correlated positions considered together.
- leverage: The ratio of position value to margin; ESMA caps it for retail CFDs from 30:1 to 2:1 depending on the instrument.
- demo account: A practice account with virtual money; it cannot reproduce the emotions or all execution conditions of live trading.
Official sources
- ESMA, 27 March 2018: ESMA agrees to renew and expand restrictions on CFDs (leverage limits, margin close-out, negative balance protection, 74-89% retail loss statistic)
- MetaTrader 5 Help: Trading, general concept (positions, stop loss and take profit)
- MetaTrader 5 Help: Testing report (profit factor, expected payoff, maximal drawdown, recovery factor, Sharpe ratio)
Go further
The full lesson has narrated slides, more scenario questions with explained answers and a simulation.
Open the AcademyWatch on YouTubeEducational content, not financial advice. Trading involves risk of loss.