1. Trader Breaches the Rule (Risk exceeds 3%):
- Initial Account Balance: $100,000
- Maximum Risk per Position: 0.03 × $100,000 = $3,000
- Trader’s Unrealized/Realized Loss: $5,000
In this case, the trader’s unrealized or realized loss on the position is $5,000, which exceeds the maximum allowable risk of $3,000 (3% of the initial balance). Since the trader has lost more than 3% of the account balance, this is a breach of the rule.
2. Trader Does Not Breach the Rule (Risk is within the limit):
- Initial Account Balance: $100,000
- Maximum Risk per Position: 0.03 × $100,000 = $3,000
- Trader’s Unrealized/Realized Loss: $2,500
In this case, the trader’s unrealized or realized loss is $2,500, which is within the maximum allowable risk of $3,000. Therefore, the trader has not breached the rule and is within the risk limits.
Note: The trader can use more than 3% of their capital in a single position as long as the risk (realized or unrealized loss) does not exceed 3% of the account balance.