You measure the risk of a trade by answering one question before you enter: how much money do you lose if your stop loss is hit? Express that number two ways, as a percentage of your account and in currency. Risking 1% of a $50,000 account means a $500 loss if the stop is hit.
That single number is the base of money management. From it you get the R-multiple, your total open risk across trades, and a clear picture of what drawdowns and losing streaks do to an account. Each measure below comes with the arithmetic, using example prices.
Risk per trade: percent and currency
Risk per trade is the amount you would lose if the trade reaches its stop loss:
Risk amount = Account balance × Risk %
| Account | 0.5% risk | 1% risk | 2% risk |
|---|---|---|---|
| $10,000 | $50 | $100 | $200 |
| $50,000 | $250 | $500 | $1,000 |
| $100,000 | $500 | $1,000 | $2,000 |
Thinking in percent keeps your risk in proportion to the account. Many traders choose a figure between 0.5% and 1% per trade, because it keeps long losing streaks survivable. Whatever you pick, write it down and apply it to every trade, whether you recalculate it from your current balance or fix it from your starting balance.
From stop distance to money at risk
The percentage is your plan. What actually sets the loss is the distance from entry to stop and your position size:
Money at risk = Stop distance × Value per point × Position size
For example, on a $50,000 account:
- EUR/USD: buy 1.5 lots at 1.0850 with a stop at 1.0820. The stop is 30 pips, and one pip on one standard lot is worth $10. Risk = 30 × $10 × 1.5 = $450, or 0.9% of the account.
- Gold (XAU/USD): buy 0.3 lots at $2,400 with a stop at $2,390, on a platform with 100 oz per lot, where a $1 move is worth $100 per lot. Risk = 10 × $100 × 0.3 = $300, or 0.6%.
- Bitcoin (BTC/USD): buy 0.2 BTC at $65,000 with a stop at $63,800. Each $1 move is worth $1 per coin. Risk = 1,200 × $1 × 0.2 = $240, or 0.48%.
Add the spread and any likely slippage to the stop distance for a realistic figure. Pip and contract values are explained in pips, lots and leverage, and running this calculation backwards, from the risk you want to the size you trade, is position sizing.
The R-multiple: results in units of risk
R is the amount you risk on a trade. If you risk $500, then 1R = $500, and every result can be written as a multiple of it:
- A $1,250 win is +2.5R.
- A full stop-out is −1R.
- Closing early for a $200 loss is −0.4R.
- A stop that slips and costs $600 is −1.2R.
R-multiples put trades of different sizes and instruments on one scale. A +2R gold trade and a +2R EUR/USD trade did the same job, whatever the dollar amounts. Recording R for every trade in a trading journal shows you plainly what your trading produces.
Total open risk and correlated positions
Risk per trade is not enough once you hold several positions at once. Total open risk is the sum of the money at risk on every open position, measured at their stops.
Correlated positions make this matter more. Trades that depend on the same driver tend to win and lose together, so they act as one bigger bet. Two gold trades opened at different prices are one gold position. Several trades against the US dollar are one dollar trade:
| Open position | Risk | What it really is |
|---|---|---|
| Buy EUR/USD | $1,000 | A bet against the US dollar |
| Buy GBP/USD | $1,000 | A bet against the US dollar |
| Sell USD/JPY | $1,000 | A bet against the US dollar |
| Total | $3,000 | One 3% bet on a $100,000 account |
If the dollar strengthens sharply, all three stops can be hit on the same day. A simple habit: set a maximum total open risk, such as 2% or 3% of the account, and count correlated positions together when you check it.
Drawdown, recovery and losing streaks
Drawdown is the fall from your account's highest value, its peak, to a later low, measured as a percentage of the peak. For example, if your account peaks at $105,000 and falls to $97,650, the drawdown is $7,350 ÷ $105,000 = 7%.
The recovery math
Losses and gains are not symmetrical. After a loss you are working from a smaller balance, so you need a bigger percentage gain to get back:
Gain needed to recover = Loss ÷ (1 − Loss)
| Loss | Gain needed to recover |
|---|---|
| 5% | 5.3% |
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 40% | 66.7% |
| 50% | 100% |
For example, a $100,000 account that loses 20% drops to $80,000. Getting back to $100,000 takes a $20,000 gain, which is 25% of $80,000. That is why keeping drawdowns small matters more than chasing large wins.
Losing streaks: 1% versus 5% risk
Losing streaks happen even with a sound method. If your win rate is 40% and trades are independent of each other, there is roughly a 70% chance of at least one run of 10 or more losses somewhere in 500 trades.
Here is what a streak does to a $100,000 account when you risk a fixed percentage of the current balance on each trade:
| Losses in a row | Balance at 1% risk | Balance at 5% risk |
|---|---|---|
| 0 | $100,000 | $100,000 |
| 2 | $98,010 | $90,250 |
| 5 | $95,099 | $77,378 |
| 10 | $90,438 | $59,874 |
| Gain needed to recover after 10 | 10.6% | 67.0% |
At 1% per trade, ten losses cost under 10%. At 5% per trade, the same streak costs about 40%. The loss is about four times bigger, but the gain needed to recover is more than six times bigger. If you fix risk in dollars from the starting balance instead, it is worse: ten losses of $5,000 each is −50%, which needs a 100% gain.
Expectancy: what a trade is worth on average
Expectancy is the average amount you make or lose per trade over many trades:
Expectancy = (Win rate × Average win) − (Loss rate × Average loss)
For example, suppose your journal shows a 45% win rate, an average win of $1,500 and an average loss of $1,000:
- Expectancy = (0.45 × $1,500) − (0.55 × $1,000) = $675 − $550 = $125 per trade
- In R, with $1,000 as 1R: (0.45 × 1.5) − (0.55 × 1) = +0.125R per trade
Now take a 60% win rate, an average win of $600 and an average loss of $1,000: (0.60 × $600) − (0.40 × $1,000) = $360 − $400 = −$40 per trade. A high win rate does not ensure a positive result when the losses are bigger than the wins. The guide to the risk-reward ratio shows how the two work together.
Expectancy is an average over many trades, not a promise about the next one, so calculate it from several dozen recorded trades at least.
Daily and weekly loss limits as a personal habit
A personal loss limit is a rule you set for yourself: once you lose a set amount in a day or a week, you stop trading until the next period. It protects you from the rushed decisions that often follow a run of losses.
For example, with 1% risk per trade, you might stop for the day after a 2% loss (two full stop-outs) and for the week after a 4% loss. Include open trades: if a running loss would take you past your daily limit, close or reduce before it does.
If you trade an evaluation or funded account, read that account's rules as well. A personal limit works best when it sits well inside any limit the account already has.
Common mistakes
- Risking a fixed lot size instead of a fixed amount. One lot of EUR/USD risks $150 with a 15-pip stop and $600 with a 60-pip stop. Fix the money at risk, then size from the stop.
- Ignoring correlation. Three 1% trades on dollar pairs can be one 3% bet. Add correlated positions together.
- Raising risk to win back losses. The recovery math gets worse, not better. Keep the same risk per trade, or cut it during a drawdown.
- Judging a method on a handful of trades. Win rate and expectancy need a meaningful sample. Track results in R over dozens of trades before drawing conclusions.
Key takeaways
- Measure every trade's risk before you enter: the loss if the stop is hit, in currency and as a percentage of the account.
Money at risk = Stop distance × Value per point × Position size, and results in R put all trades on one scale.- Correlated positions add up to one larger bet, so track total open risk.
- Losses need bigger gains to recover: 10% needs 11.1%, 20% needs 25%, 50% needs 100%.
- Small risk per trade keeps losing streaks survivable, and expectancy tells you whether a method holds up over many trades.
Frequently asked questions
How much should I risk per trade?
There is no single right number, but many traders risk between 0.5% and 1% of the account per trade. At that level, even a long losing streak costs an amount you can recover from. The key is to pick a figure, write it into your plan and apply it to every trade.
How do I calculate the risk on a trade?
Multiply the stop distance by the value of a one-point move per unit, then by your position size. For example, a 30-pip stop on 1.5 lots of EUR/USD risks 30 × $10 × 1.5 = $450. Divide by your balance to get the percentage.
What is 1R in trading?
1R is the amount you risk on a trade: the loss you take if your stop is hit. Results are written as multiples of it, so a win twice the size of the risk is +2R and a full loss is −1R. It makes trades of different sizes and instruments comparable.