Risk per trade: the 1-2% rule
What you learn in 3 minutesThis lesson shows how one number decides everything else on a trade: the amount of money you are willing to lose if the trade goes against you. Before you choose a lot size, a stop level or a target, you choose that number. A common starting point is 1 to 2 per cent of the account, and the difference between 1 per cent and 20 per cent is the difference between an account that survives a bad run and one that does not.
Two accounts, twenty trades, one per cent against twenty per cent
| Step | Amount | Note |
|---|---|---|
| Starting balance | KSh 129,000 | A deposit of USD 1,000 converted at about KSh 129 to the dollar. The rate moves, so the shilling figure moves with it. |
| Risk per trade at 1 per cent | KSh 1,290 | 129,000 multiplied by 0.01. |
| Risk per trade at 20 per cent | KSh 25,800 | 129,000 multiplied by 0.20. |
| Losses in the run | 12 of 20 trades | A losing run of this length happens to most people at some point. It is not unusual. |
| Balance after 12 losses at 1 per cent | KSh 113,520 | 1,290 multiplied by 12 is 15,480. 129,000 minus 15,480. |
| Balance after 12 losses at 20 per cent | KSh -180,600 | 25,800 multiplied by 12 is 309,600, which is more than the account holds. The account is gone before the run ends. |
The broker may round lot sizes, charge a spread on entry and exit, and add a commission or swap. Those costs vary between brokers and are not included above.
The mistake people make here
The common mistake is to pick a lot size first because it looks affordable, then place the stop wherever the chart seems to allow. That reverses the order. The stop distance and the lot size together decide the loss, so the loss is set by accident rather than by choice. Decide the money first, then find the stop distance from the chart, then work out the lot size that fits. If the number that fits is smaller than the minimum the broker allows, the trade is too big for the account and should be left alone.Check yourself
An account holds KSh 129,000. You risk 1 per cent on one trade. The stop is 20 pips away on EUR/USD. One pip on one standard lot is 10 units of the quote currency, which is about KSh 1,290 at 129 shillings to the dollar. What lot size fits?
Risk is 129,000 multiplied by 0.01, which is KSh 1,290. One pip on one standard lot costs about KSh 12.90. The stop is 20 pips, so one standard lot would lose 20 multiplied by 12.90, which is KSh 258. That is more than 1,290 divided by 258, so the size that fits is about 0.05 of a standard lot.
The same account risks 5 per cent instead. What is the loss per trade in shillings, and how many such losses would empty the account?
5 per cent of 129,000 is KSh 6,450. Twenty losses of 6,450 would be 129,000, so twenty losses in a row would take the account to zero. At 1 per cent the same twenty losses leave KSh 103,200.