Risk management is the single most important skill in trading. It doesn't matter how good your strategy is — without proper risk management, one bad trade can wipe out months of gains. This guide covers everything you need to protect your capital.
Never risk more than 1-2% of your account on a single trade. This is the foundation of professional risk management.
Why? If you risk 2% per trade and lose 10 trades in a row, you've lost about 18% of your account. Painful, but recoverable. If you risk 10% per trade, 10 losses wipes you out completely.
Use our Position Size Calculator to automatically calculate the correct lot size based on your risk percentage.
A stop loss is a pre-set price at which your trade automatically closes to prevent further losses. It's not optional — it's mandatory for every trade.
Place your stop loss at a logical level — below support for long trades, above resistance for short trades. Never place it based on how much money you want to lose.
Before entering any trade, calculate your risk-to-reward ratio. This compares your potential loss (distance to stop loss) vs your potential gain (distance to take profit).
Minimum target: 1:2 risk/reward. For every $1 you risk, aim to make $2. At 1:2, you only need to be right 40% of the time to be profitable.
Calculate your R:R ratio before every trade with our Risk/Reward Calculator.
Position sizing determines how many units or lots you trade. It's calculated from three things: your account balance, your risk percentage, and your stop loss distance.
Formula: Lot Size = (Account × Risk%) ÷ (Stop Pips × Pip Value)
This ensures that no matter how far your stop loss is, you always risk the same dollar amount per trade.
Drawdown is the decline from your account peak. Keeping drawdown small is critical because recovering from large losses requires exponentially larger gains.
A 50% drawdown requires a 100% gain just to break even. Keep max drawdown under 20% if possible.
Track your drawdown with our Drawdown Calculator.