Risk Management for Traders
The number one reason traders fail is not bad analysis — it is bad risk management. Here are the rules that separate surviving traders from blown-up accounts.
The 1% Rule
Never risk more than 1–2% of your total account on a single trade. With a £10,000 account and 1% risk, your maximum loss per trade is £100. This means you can be wrong 20 times in a row and still have 80% of your capital.
Position size = (Account × Risk %) / (Entry - Stop Loss)
Example: £10,000 account, 1% risk, 50 pip stop loss
Risk amount = £100
Position size = £100 / 50 pips = £2 per pip
Risk-Reward Ratio
Always aim for at least a 1:2 risk-reward ratio. If you risk £100 on a trade, your target profit should be at least £200. With a 1:2 ratio, you only need to be right 34% of the time to break even.
Before entering any trade, define your stop loss (where you exit if wrong) and take profit (where you exit if right). If the risk-reward is less than 1:1.5, do not take the trade.
Drawdown and Recovery
| Drawdown | Gain needed to recover |
|---|---|
| 10% | 11% |
| 20% | 25% |
| 30% | 43% |
| 50% | 100% |
| 75% | 300% |
This is why preserving capital matters more than making money. A 50% loss requires a 100% gain to recover. The maths is brutal and asymmetric. Control your losses and the profits take care of themselves.
Core Risk Rules
- 1.Always use a stop loss. No exceptions, no mental stops.
- 2.Never move a stop loss further away from your entry.
- 3.Do not add to losing positions (averaging down).
- 4.Limit total portfolio risk to 5–6% at any one time (max 5–6 trades at 1% each).
- 5.If you lose 3 trades in a row, stop trading for the day. Emotional trading multiplies losses.
Risk/Reward Ratio Diagram
Video: Risk Management
The Plain Bagel — Risk Management for Traders