In short
- Decide how much you will lose before you decide how much you want to make.
- Keep the risk on any single trade small, commonly 0.5% to 2% of your account.
- Losses are harder to recover than they look: a 50% loss needs a 100% gain to get back to even.
- Set daily or weekly loss limits and stop trading when you hit them.
Why risk comes first
Nobody can control whether the next trade wins. You can control how much it costs if it loses. Traders with an average strategy and strict risk rules often last longer than traders with a good strategy and no rules, because they survive the losing streaks that every approach goes through.
The maths of losses
| Loss | Gain needed to recover |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 50% | 100% |
| 75% | 300% |
Small losses are easy to recover from. Large ones may never be recovered. Protecting the account is the priority.
1. Size every position from your risk
Choose the maximum you are prepared to lose on a trade as a percentage of your account, then calculate the position size that matches your stop-loss distance.
The position size calculator does this for forex and gold. At 1% risk, ten losses in a row cost about 10% of the account. At 5% risk, the same streak costs about 40%.
2. Use a stop-loss, and put it in the right place
Place the stop where the reason for the trade is proven wrong, such as below a level the price should not break, not at a random distance. Then size the position to that stop. Moving a stop further away to avoid taking a loss is one of the most common ways small losses become large ones. Remember that in fast markets a stop can fill beyond its level (slippage).
3. Think in risk-reward
Compare what you stand to lose with what you realistically stand to gain. A trade risking 20 pips to make 40 has a 1:2 risk-reward ratio.
At 1:2, you break even winning about 33% of trades, before costs
A high ratio is only useful if the target is realistic. Costs from spreads and commissions reduce the effective reward on every trade.
4. Respect leverage
Leverage lets a small deposit control a large position. It does not change your pip value, but it makes it easy to take positions far larger than your risk rules allow. Check what each trade ties up with the margin calculator, and keep plenty of free margin to avoid forced liquidation.
5. Watch correlation
Buying EUR/USD, GBP/USD and gold at the same time can amount to one large bet against the US dollar. If your positions tend to move together, add their risk up as if it were a single trade.
6. Set loss limits for the day and week
Decide in advance that you will stop trading after losing, for example, 3% in a day or 6% in a week. Limits protect you from emotional decisions after a bad run, which is when the most damaging trades tend to happen.
7. Be careful around events
Central bank decisions and major data releases can cause spreads to widen and prices to jump past stops. Weekend gaps can do the same. Many traders reduce size or stay out around these times.
8. Keep a journal
Record every trade: why you took it, where the stop and target were, the size, the costs and the result. Over time, a journal shows which setups work, which habits cost money and whether you are following your own rules.
Frequently asked questions
What is the 1% rule in trading?
It means never risking more than 1% of your account on a single trade. It is a guideline many traders use to make sure a losing streak does not cause lasting damage.
Should I always use a stop-loss?
For leveraged trading, a stop-loss or another predefined exit is one of the main ways to limit losses. Understand that stops can be filled at worse prices in fast markets.
What is a good risk-reward ratio?
There is no single answer. It depends on how often your approach wins. A ratio only makes sense alongside a realistic win rate and after costs.