Forex risk management means deciding how much you can lose before you trade. It comes down to three rules. Risk 1 percent per trade. Always use a stop loss. Size the trade from the stop.
Why risk comes first
Every strategy and every signal provider has losing streaks. The question is whether your account can take one. Compare 8 losses in a row:
| Risk per trade | Loss after 8 losses | Gain needed to recover |
|---|---|---|
| 1 percent | about 8 percent | about 8 percent |
| 5 percent | about 34 percent | about 51 percent |
| 10 percent | about 57 percent | about 132 percent |
The 1-percent trader is annoyed. The 10-percent trader must more than double the account just to get back to zero.
The three rules
Rule 1: risk 1 percent. Pick a fixed share of your account for one trade. For most people it is 1 percent. On a 2,000-dollar account that is 20 dollars.
Rule 2: always use a stop loss. A stop loss closes your trade at a set price if it goes against you.
- Put it where your idea is wrong. Usually just past a recent high or low.
- Never move it further away.
- Do not make it too tight. A stop inside normal noise gets hit by a wiggle.
- A signal without a stop is not a signal. Skip it.
Rule 3: size the trade from the stop.
Lot size = risk in money ÷ (stop in pips × pip value of one lot)
Wider stop, smaller lot. Tighter stop, bigger lot. The money at risk stays the same.
Risk to reward
A 1:2 ratio means your target is twice as far as your stop. With 1:2 you can lose half your trades and still grow. Before taking a signal, check the target. It should be at least 1.5 times the stop distance.
Example
- Account: 3,000 dollars. Risk: 1 percent, so 30 dollars.
- Signal: Sell gold at 2,412. Stop 2,420. Target 2,396.
- Stop is 8 dollars away. Target is 16 dollars away. Ratio 1:2.
- On gold, 0.01 lot loses about 8 dollars at this stop.
- 30 ÷ 8 = 3.75. Round down to 0.03 lot. Risk is 24 dollars.
- If stopped, you lose 24 dollars. If the target hits, you gain 48.
Mistakes to avoid
- No stop loss, or a “mental” stop you do not honour.
- Doubling the lot after a loss to win it back.
- Trading on after a bad day. Lose 3 percent in a day? Close the platform.
- Keeping total open risk above 3 to 4 percent. Buying
EUR/USDandGBP/USDtogether counts as nearly one trade.
Risk management is boring on purpose. It is the only part of trading you fully control. Next, read how to read a forex signal.
Questions, answered plainly.
What is the 1% rule in forex?
You never risk more than 1 percent of your account on one trade, so 10 dollars on a 1,000-dollar account.
Where should I put my stop loss?
At the price that proves your idea wrong, usually just past a recent high or low, then size the trade so that loss is 1 percent.
What is a good risk-reward ratio?
At least 1:1.5 or 1:2, meaning the target is 1.5 to 2 times further away than the stop.