How much to risk and when to stop:the rules that keep you from the drop.
The process of budgeting, saving, and controlling trading capital to ensure long-term survival.
Effective money management includes setting maximum risk per trade and maintaining appropriate position sizes.
In plain words
Money management is the set of rules a trader uses to decide how much of the account to put at risk on each trade and in total. Its central idea is position sizing: choosing the trade size so that a loss at the planned exit costs a known, limited part of the account.
See it move
5% per trade: the largest here
Why it matters
It determines how many losing trades an account can absorb before it is seriously damaged. The arithmetic is unforgiving: the more that is lost, the larger the percentage gain needed to get back, so a 50% loss needs a 100% gain to recover.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
An account of 10,000 US dollars limits the risk on one trade to 1%, with the stop-loss, the price at which the trade is closed at a loss, 50 pips from entry.
- 1Amount at risk10,000 × 0.01 = 100 US dollars
- 2Value per pip allowed100 ÷ 50 = 2 US dollars
- 3One standard lot is worth 10 US dollars per pip, so 2 ÷ 10 = 0.20 lots
A trade of 0.20 lots loses 100 US dollars, or 1% of the account, if it is closed at the stop-loss price.
A common mistake
Sizing a trade by how confident one feels is not money management. The rule is set before the trade, and a stop-loss limits the loss only if it is filled at its price, which a gap or slippage can prevent.
Check yourself
Learn more
- Academy lessonPosition sizingLot sizes, the percent-risk model, fixed-fractional sizing and the Kelly criterion, with the formulae and a worked example.
- Academy lessonTrading psychologyThe recurring psychological pitfalls in trading (FOMO, revenge trading, overconfidence, hesitation) and the routines used to keep decisions consistent.
- GuideFive risk management rules for leveraged tradingRisk per trade, stop placement, the reward-to-risk arithmetic, correlated exposure and a written plan: five habits that limit how much a single mistake can cost.
- GuidePosition sizing: the arithmetic of risk per tradeFixed percentage, fixed amount, Kelly and volatility-based sizing, with the formula and a worked example for each.
Educational information, not investment advice or a recommendation to trade.