Beginner · Lesson 7 of 11 · 9 min read
Risk management
You cannot control whether a trade wins. You can control how much you lose when it does not. This is the most important lesson in trading.
Why risk comes first
Even good strategies lose 40 to 60% of their trades, and losing streaks of 5 to 10 in a row happen to everyone. Risk management makes sure a bad run is a small dent, not the end of your account.
| If you lose | You need this gain to get back |
|---|---|
| 10% | 11% |
| 20% | 25% |
| 30% | 43% |
| 50% | 100% |
Big losses are very hard to come back from. That is why professional traders care more about protecting their account than about any single trade.
The 1% rule
Risk 1% of your account or less on each trade. With £5,000, that is £50 per trade. Ten losses in a row would cost about 10%, which you can recover from.
Many professionals risk 0.5% or less. Start small while you are learning: you can always risk more later.
Always use a stop loss
A stop loss is an order that closes your trade automatically at a price you choose. It is the point where your idea is proved wrong.
- Put it where the trade idea no longer makes sense, such as just beyond the swing low for a buy, not at a random distance.
- Give it room: a stop inside normal market noise gets hit for no reason. The ATR shows how far a market normally moves.
- Never move a stop further away to avoid a loss.
Position size
Your position size is what turns “1% risk” into a real number of lots. It depends on your stop distance: a wider stop needs a smaller position.
Account: $10,000. Risk 1% = $100. You buy EURUSD with a stop 20 pips away. On EURUSD, 1 pip on 1 standard lot is worth about $10.
Position size = $100 ÷ (20 pips × $10) = 0.5 lots. If the stop is hit, you lose about $100, plus the spread.
You do not need to do this by hand: the Position Size tool works it out for you.
Risk : reward
Risk:reward compares what you could lose with what you could make. Risking $100 to make $200 is 1:2. Traders often call the amount risked 1R, so this target is 2R.
| Risk : reward | Win rate needed just to break even |
|---|---|
| 1 : 1 | 50% |
| 1 : 2 | 33% |
| 1 : 3 | 25% |
A bigger reward lets you be wrong more often, but bigger targets are reached less often. What matters is the balance between your win rate and your average win, measured over many trades (spreads and fees included).
Leverage
Leverage lets you control a large position with a small deposit (margin). It makes both profits and losses bigger. In the UK, brokers must limit leverage for retail clients, for example to 30:1 on major currency pairs. High leverage is not a reason to trade bigger: your position size should always come from your 1% risk, not from how much the broker lets you open.
- Trading without a stop loss.
- Doubling your size after a loss to “win it back”.
- Opening several trades on related markets (for example EURUSD, GBPUSD and gold against the dollar) that are really one big bet.
Common mistakes
- Risking 5 to 10% per trade because “this one is a sure thing”.
- Moving the stop loss further away when price gets close to it.
- Picking a lot size by feel instead of working it out from the stop distance.
Check yourself
1. Your account is £2,000 and you risk 1%. What is the most you should lose on one trade?
£20.
2. You lose 50% of your account. How much do you need to make to get back to where you started?
100%: you need to double what is left.
3. Your stop gets wider. What should happen to your position size?
It should get smaller, so the amount at risk stays at 1%.
Try it on BTM
For education only, not financial advice. Trading carries a high risk of losing money, especially with leverage. Only trade with money you can afford to lose.
For educational purposes only. Nothing here is financial advice. Past performance does not guarantee future results, and trading carries a high risk of losing money, so only trade with money you can afford to lose. Read the risk warning.