Risk management introduction

Managing your risk is one of the top aspects you need to get right if you want to be consistently profitable and make use of the compounding effect. Often people risk a fixed amount of pips with a fixed lot size, but this means your risk is not the same if you trade different pairs. One pip of EURUSD is worth a different amount than one pip of AUDCAD.

Here are some hard guidelines I developed over the last few years, ordered by their importance:

1. I never risk more than 1% of my capital on a single trade. Never. In the early days used 0.25% on all trades, when I got more confident with my strategy I went to 0.5% and I am still using either 0.25% or 0.5% depending on how convinced I am of the idea/setup. If you are sure you know what you are doing, you know from real-life what your win/loss ratio is, you might scale that up to 1% and stay there. I will never go beyond 1% risk per trade – this is a hard-learned rule I will never violate. Full stop.
2. You can open multiple positions on a single trade idea, but only if all previous trades are on break-even. If your model gives you a second entry, go for it. You can take profit faster or take partials and just pay yourself, while you maintain the full volume on the better-positioned position.
3. Define a cut-off for trading for a certain day e.g. stop trading after X losses or a predefined percentage. I stop trading after taking 3 losses in one day – this means I cap my max losses per day somewhere between 0.75% and 1.5%. This helps me and will help you avoid over-trading and taking excessive losses. Protecting your capital needs to be your number one priority. You can only make money if you have money (sad but true).
4. I suggest risking a certain percentage of your capital on each trade (see point 1), I do not trade a fixed pip amount/lot size. You may also risk a fixed amount e.g. 10 / 50 / 100 EUR per trade if you are more comfortable with that. Nominally it is easier for your brain to take a 0.5% loss than a 10 EUR loss (even if these are equal). Generally, it is also a good idea to disable the EUR display of your position and show only the percentage. In trading, you must ensure your emotions do not interfere with the execution of your strategy as this will impact your performance (in most cases negatively).
5. Think about how much you can lose when planning a trade, not how much you can gain. If you lose – you lose what you planned. If you win it’s a bonus. But if you plan on winning and hit a stop, you will feel as if you’ve not only hit a stop but also lost your winnings. Double fail for the brain, which can lead to all sorts of bad habits, revenge trading, negative emotions etc.
6. Use a trade manager to help you automatically manage your trades – take partials, move the stop to break-even, trail stop etc. I use Trade Assistant on both MT4 and MT5. It is definitely worth the investment. Saves you tons of stress, too.

Off the top of my head, I think this is it. These are the main 6 rules I follow and I can proudly say that I’m not entirely broke yet, mainly because of these rules. At this point, I do have to say that, like many traders, I did break all of the above rules repeatedly and I did pay for this (literally) so I do speak from real-life experience. You will need to make these mistakes as well unless you are one of the very few people who actually learn from others’ mistakes. If you are, congratulations. If you’re not, like me, put on your seat belt. It won’t be a very pleasant ride but you will learn a lot on the way.