Risk per trade: the 1-2% rule
What you learn in 3 minutesBefore you choose a lot size, a stop level or a target, you choose one number: the most you are willing to lose on a single trade. This lesson shows how that number is set as a small share of your account balance, and what happens to the account when it is set too high. The figures are in naira, because that is what leaves your account and what you must be able to replace.
One account, two risk sizes, twenty trades
| Step | Amount | Note |
|---|---|---|
| Account balance | ₦1,600,000 | a starting figure used for this example only |
| Risk at 1 per cent | ₦16,000 | 1,600,000 x 0.01 |
| Risk at 12.5 per cent | ₦200,000 | 1,600,000 x 0.125, chosen to match the brief's $200 against $1,000 |
| Twenty trades at ₦16,000 lost each | ₦320,000 | 16,000 x 20 |
| Twenty trades at ₦200,000 lost each | ₦4,000,000 | 200,000 x 20, which is more than the account holds |
| Balance left after the first case | ₦1,280,000 | 1,600,000 minus 320,000 |
| Balance left after the second case | ₦0 | the account cannot lose more than it holds; it stops before twenty trades |
Your broker sets its own minimum trade size, spreads and any commission, and these vary between brokers. A real loss can also be larger than planned if a stop is filled at a worse price, or if the market gaps over the weekend.
The mistake people make here
The common mistake is to pick the lot size first, because a bigger size looks like a bigger opportunity, and only afterwards ask what a stop would cost. That order hides the risk. Instead, write down the money you are willing to lose, then work out the position size that makes your stop equal to that amount. If the size that fits your risk looks too small to be interesting, the honest answer is that the account is too small for that trade, not that the risk should be raised.Check yourself
An account holds ₦800,000 and the reader risks 2 per cent on one trade. How much is that in naira?
800,000 x 0.02 = ₦16,000.
The same reader takes ten trades and loses the planned amount on each. How much is gone?
16,000 x 10 = ₦160,000, leaving ₦640,000.
If the reader instead risked ₦80,000 per trade, how many such losses would empty the account?
800,000 divided by 80,000 = 10 trades. The account would be gone after ten losses, before any recovery.