All TermsConcept

Risk Management

Risk management is the practice of controlling how much capital is exposed on any single trade. The two main levers are position size and stop-loss placement. The most-cited rule is "never risk more than 1–2% of your account on any single trade."

The 1% rule

Risk no more than 1% of your account per trade. With a 50% win rate and 1:2 payoff, you can survive 14 consecutive losses (not unheard of) and still have 87% of your account.

Position sizing formula

position_size = (account × risk%) / (entry_price − stop_loss_price) × pip_value

For XAUUSD with $10,000 account, 1% risk, 200-pip stop:

position_size = $100 / (200 × $1) = 0.5 lots

Use our position size calculator.

Volatility scaling

Static stops break under different market regimes. ATR-based stops adapt — see ATR Trend Follow.

Drawdown is the constraint

A 1% per-trade risk plus 14 consecutive losses = 13% drawdown. Going to 2% risk and 14 losses = 25% drawdown — psychologically much harder to recover from.

Related Terms

Drawdown

Drawdown is the percentage decline from a peak in your account equity to the next trough — the most important number in risk management.

Position Sizing

Position sizing converts risk percentage into actual lot sizes — the math that makes risk management real.

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