Risk management
Position sizing, stop placement, risk-reward, correlation and drawdown: the rules that keep a trading account alive.
Strategy decides whether you make money over hundreds of trades. Risk management decides whether you survive long enough to find out.
Rule one: risk a fixed fraction
Decide the maximum you will lose on any single trade as a percentage of your account. One percent is standard for beginners; two percent is the ceiling most professionals use. This is not conservative. At 1 percent, ten losses in a row costs 10 percent. At 5 percent, the same streak costs 40 percent and requires a 67 percent gain to recover.
Rule two: size from the stop, not from the account
Wider stop, smaller position. The stop goes where the trade idea is wrong; the size adapts.
Rule three: risk-reward
Before entering, compare the distance to your stop with the distance to your target. A trade risking 50 pips to make 100 has a 2:1 reward-to-risk ratio. With a 2:1 ratio you can be wrong 60 percent of the time and still profit. With 1:1 you need to be right more than half the time after costs. Refuse trades below 1.5:1.
Rule four: cap total exposure
Three open trades all long the US dollar are one trade in three places. Correlated positions multiply risk. Limit total open risk to around 3 to 5 percent of the account and check whether your positions share a driver.
Rule five: define a drawdown limit
Decide in advance what loss makes you stop and review: for example, 6 percent in a month. When it is hit, you stop trading for the month and study the journal. This turns a bad month into a lesson instead of a disaster.
Stop placement
Trailing and partial exits
Once a trade moves in your favour by one unit of risk, many traders move the stop to breakeven or take partial profit. This lowers average winners but also lowers the chance a winner becomes a loser. Test both approaches; the right answer depends on the strategy.
Leverage is not risk
Leverage is a tool; risk is the amount you can lose. A 30:1 account with 0.2-lot positions and 1 percent risk per trade is safer than a 5:1 account trading full margin. Use leverage to hold the correct position size with a comfortable margin buffer, never to hold a larger position than the risk rule allows.