The 30-second brief
5 points- 01Limiting risk to 1–2% of equity per trade means ten consecutive losses draw the account down by roughly 10–20%, not to zero.
- 02A stop-loss defines the loss before the trade is opened. Position size follows from the stop distance, not the other way round.
- 03At a 1:2 risk-to-reward ratio, four wins in ten trades nets +2R before costs. The arithmetic says nothing about whether a strategy will achieve that.
- 04Correlated positions are one position in disguise: long EUR/USD and long GBP/USD is largely a single view on the dollar.
- 05A written plan and a journal make deviations visible.
On this page
Why risk management comes first
The five rules outlined below are conventions that many traders use. They are set out here as examples of how risk can be limited, not as recommendations, and none of them makes a strategy profitable.
Rule 1: A limit on risk per trade (the 1-2% convention)
The one-percent rule is a convention many traders use: on any single trade, the planned loss is kept to 1-2% of total account equity. It is an example, not a recommendation, and the figure that suits one person or strategy will not suit another. On a $10,000 account it puts the planned loss per trade at $100 to $200. What the convention protects against is a run of ordinary losses: ten consecutive losses — which can happen to any strategy — draw the account down by roughly 10-20% rather than wiping it out. What it does not protect against is a loss larger than the one planned, when a market gaps through a stop or several positions that move together lose at once, and it does nothing to make a losing strategy profitable. The position size calculator shows the arithmetic, and the Risk Room shows what a run of losses does at different percentages.
To implement this rule, calculate your position size based on the distance between your entry and stop loss. If you are buying EUR/USD at 1.1000 with a stop at 1.0950 (50 pips), and you want to risk $100 on a $10,000 account, your position size is $100 / (50 pips x $10 per pip for a standard lot) = 0.20 lots.
Rule 2: Always use stop losses — no exceptions
A trade without a stop loss is not a trade — it is a gamble. Stop losses define your risk before you enter the market. Place them at technically significant levels: below a support zone for long trades, above a resistance zone for shorts.
This is particularly important around major news events and over weekends, which are also the times a stop is least dependable: an ordinary stop loss becomes a market order when it is triggered, so in a gap or a fast market it can be filled at a worse price than the one set.
Rule 3: A minimum risk-reward ratio (the 1:2 convention)
A convention many traders use is to take a trade only when the profit target is at least twice the distance of the stop loss. With a 1:2 risk-reward ratio, a trader who wins only 40% of trades still has positive arithmetic before costs. The mathematics are simple: ten trades with 1:2 risk-reward, winning four and losing six, yields a net profit of +2R (4 x 2R wins = 8R minus 6 x 1R losses = 6R, net = +2R).
The ratio describes a plan, not a result. A distant target is reached less often than a near one, so a higher ratio usually comes with a lower win rate, and the arithmetic says nothing about whether a strategy will achieve either number. The 1:2 figure is an example, not a recommendation. The risk-reward calculator shows the break-even win rate for any ratio.
Identify your take-profit levels before entering a trade. Use Fibonacci extensions, previous swing highs/lows, or round psychological numbers. Under this convention, a setup that does not offer at least 1:2 is passed over.
Rule 4: Limit correlation exposure
Diversification in forex is different from stocks. Many currency pairs are highly correlated. If you are long both, you are effectively doubling your risk on a single theme (dollar weakness). Similarly, being long EUR/USD and short USD/CHF is nearly the same position.
Before adding a new trade, many traders check its correlation with their existing positions. A threshold often quoted is 70% (a coefficient of 0.7): above it, two positions are treated as largely one, and sizes are reduced or one of the two is dropped. The figure is a rule of thumb, not a boundary. Correlation is measured over a past window, it changes, and it tends to rise in stressed markets, which is when it matters most. The Risk Room shows how holdings that move together add up.
Rule 5: Trade with a plan — stick to it
Every trade should be part of a written trading plan that specifies: the setup criteria, entry trigger, stop-loss level, take-profit target, and position size. Before placing the trade, review the plan. After the trade closes, journal the outcome and compare it against your plan.
Emotional deviations from your plan — moving stops, adding to losers, revenge trading after a loss — are the primary account killers. If you find yourself deviating, step away from the screen. The market will be there tomorrow.
Putting it all together
These five rules are not complex, but they require discipline. Combined, they form a framework that limits the damage a losing streak can do. They cannot create an edge where there is none, and they do not remove the risk of loss.
Revised 4 October 2026. The 1-2% limit, the 1:2 ratio and the 70% correlation threshold were presented as rules to be obeyed. They are now described as conventions and examples, with what each does and does not protect against; two headings were reworded to match.