Risk per trade: the 1-2% rule
What you learn in 3 minutesThis lesson is about choosing the amount of money you are willing to lose on a single trade before you choose anything else. If you decide that first, the position size, the stop distance and the target all follow from it. In the example below, the difference between risking ₱600 and risking ₱12,000 on the same twenty trades is the difference between an account that is still there and one that is not.
One account, two risk sizes, twenty trades
| Step | Amount | Note |
|---|---|---|
| Account balance | ₱60,000 | the starting deposit, roughly $1,000 at the rate used here |
| Risk per trade, small | ₱600 | 1% of ₱60,000 |
| Risk per trade, large | ₱12,000 | 20% of ₱60,000 |
| Pip value on one standard lot of EUR/USD | about ₱580 | one pip is 10 units of the quote currency; 10 US dollars converted to pesos at the rate used here, and this rate moves |
| Stop distance at ₱600 risk | about 1 pip on one standard lot, or 10 pips on 0.10 lots | ₱600 divided by the pip value of ₱580 gives roughly one pip on a standard lot; the same money spread over a smaller position gives a wider stop |
| Stop distance at ₱12,000 risk | about 20 pips on one standard lot, or 200 pips on 0.10 lots | ₱12,000 divided by ₱580 gives roughly 20 pips on a standard lot |
| Twenty losses at ₱600 | ₱12,000 lost, ₱48,000 left | ₱600 multiplied by 20, taken from ₱60,000 |
| Twenty losses at ₱12,000 | ₱240,000 lost, account gone | ₱12,000 multiplied by 20 is four times the starting balance, so the account cannot survive the run |
Your broker may round the position size, charge a spread or commission on top, and quote a different conversion rate for the pip value. Check the contract specification on your own platform.
The mistake people make here
The mistake is to pick the lot size first because it looks exciting, and only then look for a stop that fits the money left. That reverses the order. Decide the peso amount you can lose, then divide it by the pip value to get the stop distance, and only then choose the position size. If the stop the chart needs is wider than your money allows, the answer is a smaller position, not a tighter stop.Check yourself
An account holds ₱80,000 and the rule is 1% risk per trade. How much is at risk?
₱800, because 1% of ₱80,000 is ₱800.
If one pip on the position you are considering is worth ₱400, how many pips can your stop be if you risk ₱800?
Two pips, because ₱800 divided by ₱400 is 2.
Twenty losses in a row at ₱800 each: how much is left from ₱80,000?
₱64,000, because ₱800 multiplied by 20 is ₱16,000, and ₱80,000 minus ₱16,000 is ₱64,000.