Chapter 16: The Risk-First Positioning Principle (RFPP)

Oct 15
3 min read

A single, repeatable rule every trader should live by: size your trades so the dollar risk is fixed first — everything else follows.

This principle makes your equity the engine that limits loss, not guesswork or emotion. Below is a clean, practical rule set and an example you can copy into your trading plan.

The Principle (short)

Decide your risk per trade as a percentage of account equity (e.g., 0.25%–1%).
Set a logical stop (based on ATR, structure, or volatility).
Compute the lot size that makes your dollar risk = (account × risk%).
Round down to the nearest tradable increment and account for spread/commissions.
Enter only when reward or process justifies the trade.

Keep risk first. Position size is a calculation, never a guess.

Why it works

Keeps drawdowns predictable and survivable.
Removes emotion from sizing (fear/greed).
Allows scaling only when edge and psychology are proven.
Makes performance comparable across different account sizes.

The RFPP Rules (copy into your plan)

Risk per trade: choose one fixed % (recommended 0.5%).
Max daily loss: stop trading if you lose X% in one day (recommended 2%).
Stop method: ATR(14) × multiplier or clear market structure (support/resistance).
Position sizing formula:
LotSize = (Account × Risk%) / (StopLossPips × PipValue_per_Lot)
Adjust for spread & commission: subtract estimated spread cost from reward and, if needed, increase stop slightly to avoid being clipped by spread.
Rounding: round down to the nearest allowed lot increment.
Journal: record the calculated lot, the final lot placed, and the reason for any manual override.

Example — step-by-step (exact arithmetic)

Assumptions:

Account balance = $2,000
Risk per trade = 0.5%
Stop loss = 20 pips
Trading EUR/USD (pip value for 1.00 standard lot = $10)

1) Calculate dollar risk

Risk % in decimal = 0.5% = 0.005
Dollar risk = Account × Risk% = 2000 × 0.005

Step-by-step multiplication:

2000 × 0.005 = 2000 × (5 ÷ 1000)
2000 × 5 = 10,000
10,000 ÷ 1000 = 10.00

So Dollar risk = $10.00

2) Calculate stop-loss dollar value (per 1 standard lot)

StopLossPips × PipValue = 20 × $10 = step-by-step:
- 20 × 10 = 200 → $200 per 1.00 standard lot

3) Compute lot size (standard lots)

LotSize = DollarRisk ÷ StopLossDollar = 10 ÷ 200

Step-by-step division:

10 ÷ 200 = 0.05

So LotSize = 0.05 standard lots

4) Convert to micro/mini lots (broker increments)

1 standard lot = 100,000 units = 1.00 standard
1 micro lot = 0.01 standard
0.05 standard = 0.05 ÷ 0.01 = 5 micro lots

So place 0.05 lots (5 micro lots)

5) Check target profit (example TP = 40 pips)

Pip profit per pip for 0.05 lot = $10 × 0.05 = step-by-step: 10 × 0.05 = 0.5 → $0.50 per pip
Profit at 40 pips = 40 × $0.50 = step-by-step: 40 × 0.5 = 20 → $20
Return on account = $20 ÷ $2,000 = 0.01 → 1.0% gain

Result: risking 0.5% ($10) to potentially gain 1.0% ($20) — a 1:2 reward:risk setup with disciplined sizing.

Practical adjustments (real world)

Spread: if spread = 1.0 pip, add it into effective stop or add 1 pip to stop distance before calculating lot size.
Commissions: convert commission into pip-equivalent and add to stop if necessary.
Rounding: always round down (never up) to avoid risking more than planned.
Minimums: if broker minimum lot forces you to risk more than your target, reduce stop (if valid) or skip trade.

Quick checklist before placing trade (RFPP Checklist)

Account & risk% set (e.g., 0.5%).
Stop loss determined and justified (ATR/structure).
Dollar risk computed and acceptable.
Lot size calculated and rounded down.
Spread & commission accounted for.
Entry plan logged in journal (entry, SL, TP, size).
Daily loss limit not breached.

When to use RFPP

Always. For every discretionary trade, algorithmic trade, swing trade, or scalp — sizing should be risk-first. This is the difference between a hobby and a repeatable trading business.

One-sentence principle to memorize

“Decide what you can lose first — then trade only the size that makes that loss real.”