Good traders are not right all the time. They survive because their losses are small and their wins are allowed to grow. Risk management is the part of trading you fully control, so it is the best place to start.
The 1% rule
Many traders never risk more than 1–2% of their account on a single trade. With a $5,000 account, 1% means a maximum loss of $50 per trade. Even ten losses in a row would leave you with about 90% of your account.
How to size a position
Position size depends on where your stop loss is, not on how confident you feel:
Example: you risk $50, buy at $40 and set a stop at $38. That is $2 of risk per share, so you buy $50 ÷ $2 = 25 shares.
Stop losses
A stop-loss order closes your trade automatically if the price reaches a level you chose in advance. Place it where your trade idea is proven wrong, for example below a recent support level, not at a random round number. In a fast market or an overnight gap, a stop can fill at a worse price than you set. See order types for details.
Risk-reward ratio
| Risk : Reward | Win rate needed to break even |
|---|---|
| 1 : 1 | 50% |
| 1 : 2 | About 33% |
| 1 : 3 | 25% |
These numbers ignore fees and slippage, which push the real break-even win rate a little higher.
A simple checklist before every trade
- Do I know my entry, stop loss and target?
- Is my risk 2% of the account or less?
- Is the potential reward at least twice the risk?
- Am I trading my plan, or my emotions?
Conclusion
You cannot control the market, but you can control how much you lose when you are wrong. Combine this with the basics in our beginner’s guide and keep a trading journal.
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