Why Risk Management Matters
Risk management is the foundation of successful trading. No matter how good your strategy is, a few bad trades can wipe out your account without proper risk management. Professional traders focus on protecting capital first, then profits.
Golden Rule: Never risk more than 1-2% of your total account balance on a single trade. This keeps you in the game and allows you to recover from a series of losing trades.
The 1-2% Rule
The most commonly recommended rule for risk management is to risk only 1-2% of your account on each trade. Here's why:
- With 1% risk per trade, you can have 20 consecutive losing trades and still retain 80% of your account
- With 2% risk per trade, you can have 10 consecutive losing trades and still retain 80% of your account
- With 5% risk per trade, just 10 losses cut your account in half
Position Sizing
Position sizing determines how many lots to trade based on your risk tolerance. The formula:
Position Size = (Account Balance × Risk %) / (Stop Loss in Pips × Pip Value)
Use our Lot Calculator to quickly determine the right position size for your trades.
Stop Loss Orders
A stop loss is an order that automatically closes your position at a predetermined level to limit losses. Key rules:
- Always use a stop loss — never trade without one
- Place it logically — below support for buys, above resistance for sells
- Never move it further — this increases your risk
- Consider ATR-based stops — use Average True Range for volatility-based stop loss
Risk/Reward Ratio
The risk/reward ratio (R:R) compares your potential loss to your potential gain. A minimum 1:2 R:R ratio is recommended — your potential gain should be at least twice your potential loss.
- R:R 1:1: You need to win more than 50% of trades to profit
- R:R 1:2: You only need to win 33% of trades to break even
- R:R 1:3: You only need to win 25% of trades to break even
Diversification
Don't put all your eggs in one basket. Diversify your trades by:
- Trading different currency pairs
- Using multiple strategies
- Trading different timeframes
- Avoiding correlated positions (e.g., don't open buys on both EUR/USD and GBP/USD simultaneously)
Emotional Discipline
Emotions are a trader's biggest enemy. Common emotional traps:
- Revenge trading: Trying to recover losses with larger positions
- FOMO: Fear of missing out, leading to entries without proper analysis
- Greed: Moving or removing take-profit targets
- Fear: Closing profitable trades too early
Remember: Trading carries high risk. Past performance is not indicative of future results. Always trade with money you can afford to lose.