Traders rarely fail for lack of a good entry. They fail because a few oversized losses erase many small wins. Risk management is the set of rules that stops that from happening.
Rule one: fix your risk per trade
Decide in advance how much of your account you are willing to lose on a single trade. Many traders use 0.5% to 2%, and beginners often start at 1% or below. The number matters less than sticking to it.
Position sizing formula
Lots = (account × risk %) ÷ (stop distance in pips × pip value per lot)
Example: an account of US$5,000, risking 1% (US$50), with a 25-pip stop on EUR/USD, where a pip is worth about US$10 per lot: 50 ÷ (25 × 10) = 0.20 lots. Check: 25 pips × US$10 × 0.2 lots = US$50.
Risk-to-reward and win rate
The win rate you need to break even depends on your reward relative to your risk (before costs): risk ÷ (risk + reward).
| Risk-to-reward | Break-even win rate |
|---|---|
| 1:1 | 50% |
| 1:2 | 33% |
| 1:3 | 25% |
Spreads, commissions and swaps raise these numbers, which is why costs matter.
Losses are harder to recover than they look
| Loss on the account | Gain needed to get back |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 50% | 100% |
Other rules that protect an account
- Set a daily or weekly loss limit and stop trading when you reach it.
- Watch correlation: long EUR/USD and long GBP/USD are often close to the same bet on the US dollar, so two trades can be one risk.
- Keep a trading journal with the reason, the result and how you felt, and review it weekly.
- Never add to a losing trade to get back to break-even.
Key takeaway
Position size is the one variable fully under your control. Fix your risk per trade, size from the stop, and keep losses small enough that you can keep trading.
General information for education only, not financial advice. Trading forex and CFDs carries a high risk of loss. Read the disclaimer.