# Risk per trade

Risk per trade is the estimated amount or percentage of account equity that could be lost on one trade if an assumed exit price is reached, excluding losses beyond that price.

## What it means

Before placing a trade, an investor can estimate the loss between a planned entry price and a planned exit price. That estimate is often expressed in US dollars and as a percentage of account equity. It is a planning measure, not a cap on the loss that can actually occur.

For a long stock position, the assumed exit price is below the entry price. An investor might use a stop-loss level as that assumption, but a stop order does not guarantee a fill at its stop price. If no exit price is specified, a single price-based risk-per-trade figure cannot be calculated without making an assumption.

## How it is calculated

For a long stock position with an assumed exit below the entry:

`Risk per trade (US$) = shares × (entry price − assumed exit price) + estimated transaction costs`

`Risk per trade (% of equity) = risk per trade (US$) ÷ account equity (US$) × 100`

- **Shares** is the number of shares in the planned position.
- **Entry price** is the assumed purchase price per share, in US$.
- **Assumed exit price** is the price per share used to estimate the loss, in US$; it is not a guaranteed fill price.
- **Estimated transaction costs** are the assumed total costs of entering and exiting, in US$. Avoid counting a spread or other cost twice if it is already reflected in an assumed fill price.
- **Account equity** is the account value used as the percentage denominator, in US$.

The formula assumes the full position enters and exits at the stated prices. A short position needs its own entry-to-exit price difference: the loss rises when the exit price is above the short-sale price. Borrowing costs and other relevant costs also need consideration.

## Worked example

The following numbers are hypothetical. An account has US$20,000 in equity, and a planned long trade uses:

- 100 shares at an assumed entry of US$50 per share.
- An assumed exit of US$48 per share.
- US$10 in estimated total transaction costs, treated as separate from the assumed prices.

First, the price difference is US$50 − US$48 = US$2 per share. For 100 shares, the estimated price loss is 100 × US$2 = US$200. Adding US$10 in costs gives **US$210 risk per trade**, or US$210 ÷ US$20,000 × 100 = **1.05% of account equity**.

The position's assumed purchase value is 100 × US$50 = US$5,000, or 25% of account equity. That 25% exposure is not the same as the 1.05% estimated loss to the assumed exit. If the actual exit fill is worse than US$48, the realized loss can exceed US$210.

## Why it matters before you trade

A pre-trade risk estimate makes the consequences of a proposed position and exit assumption visible in account-level terms. It can also reveal how quantity changes the estimate: with the same entry, exit and per-share cost assumptions, more shares mean more US dollars at risk.

The number is sensitive to the prices and costs entered. A sudden price gap, limited liquidity, market impact or an unfilled exit order can produce a different result. It also describes one trade, not the combined risk of several positions. Trades exposed to the same market or sector move can lose money together.

## How PreTrAIde uses it

PreTrAIde does not state a dedicated risk-per-trade calculation or enforce a per-trade risk limit. Its pre-trade analysis evaluates a user-built stock basket before any order is placed. For each line and the basket, it provides a GO, NO-GO or MODIFY verdict, a risk assessment, a model-estimated success probability, a suggested execution strategy and plain-language reasoning.

Its quantitative layer estimates factors relevant to a pre-trade check, including spread, market impact, daily volatility and 1-day 95% value at risk (VaR). VaR is a different risk measure; it is not the loss calculated from a chosen entry and exit. PreTrAIde is decision-support software, not a broker or investment adviser, and users place any trades themselves.

## Common mistakes

- **Treating an exit level as a guaranteed loss limit.** Stops can fill at a worse price, especially after a gap or in an illiquid stock.
- **Confusing position value with risk per trade.** A US$5,000 position and a US$210 estimated loss describe different quantities.
- **Omitting costs or counting them twice.** State whether assumed prices already include spread or slippage.
- **Ignoring account-level exposure.** Several individually small estimates can coincide when holdings are correlated.
- **Reading the percentage as a probability.** A 1.05% equity-risk estimate does not mean a 1.05% chance of losing money.

---
Source: https://pretraide.com/glossary/risk-per-trade