Risk management is the set of rules that decide how much you lose when you are wrong. Risk no more than 1% of equity per trade, size every trade from your stop distance, stop trading after a 2R loss in a day, and track expectancy in a journal. A 50% drawdown needs a 100% gain to recover.
What a strategy is
A strategy is a complete written specification: what you trade, when, how much, where you exit, what stops you trading, and how you measure it. An entry technique is only one line of it.
Think in R, where 1R is the amount you risk. The number that matters is expectancy times frequency, after costs. Win rate alone is close to meaningless: a 35% win-rate system can be twice as profitable per trade as an 80% one, before costs and frequency. See trading expectancy, the R-multiple and risk-reward, and how to tell if you have an edge.
Drawdown and ruin
Losses compound against you faster than gains compound for you. A 20% drawdown needs a 25% gain. A 50% drawdown needs 100%, and a 70% drawdown needs 233%.
Ten consecutive losses is a normal event for any strategy. At 1% risk per trade it costs 9.6% of the account. At 10% risk it costs 65%. Halving your risk reduces the chance of ruin by far more than half. Read drawdown and recovery and risk of ruin.
Position size and stops
Position size is an output. The order is level, then stop, then size. Lots equal your risk amount divided by stop distance in pips times pip value per lot. On a $5,000 account risking 1% with a 36-pip stop on EUR/USD, that is 0.13 lots. Round down, and size from equity, not balance.
- Place the stop where the idea is wrong, plus a volatility buffer. Never move it further away. How to set a stop loss covers the methods.
- Three dollar-negative pairs are one position, not three. Keep total correlated exposure to 2R.
Management and limits
Break-even stops, trailing stops and partial closes are not improvements by default. Each trades average win for win rate, or expectancy for comfort. Backtest each with and without, and believe the numbers.
Willpower depletes, so build rules that do not need it. Stop after 2R in a day, 5R in a week and 10% in a month, and automate the limit where the platform allows. Revenge trading is a predictable response to loss, not a character flaw. See trading discipline and fear and greed.
Measure and test
Journal every trade with a one-sentence thesis, the result in R, and a process score: was the plan followed, independent of the outcome. The dangerous trade is a bad process with a good outcome, because the market has rewarded a mistake. See the trading journal guide.
Backtest at least 100 trades by hand, bar by bar, with costs. 100 is a weak minimum. Several hundred is meaningful. Then forward test: 30 trades on demo, then 30 at 0.01 lots. The backtesting guide has the method. Next, apply all of this in the gold guide.
Questions
What is the 1% rule in trading?
Risk no more than 1% of account equity on any single trade, so a stopped-out trade loses 1%. It does not refer to position size, margin or leverage.
What is a realistic monthly return?
A trader with a validated edge might target 1–3% a month, with drawdowns under 15% and roughly four losing months a year. Anyone advertising 20% monthly is describing an unsustainable risk profile, a demo account or a fabrication.
Is my strategy broken?
Check three things first: your sample size, whether the drawdown is within your backtest, and your process score. Under 30 trades tells you nothing.
70–80% of retail investor accounts lose money trading CFDs. This page is education, not advice. All trade examples are constructed composites.
