Risk Management Fundamentals

The amount you are willing to risk on each trade is directly tied to your confidence in its success. Every trade is unique, so its risk profile should be too.

What is the ideal lot size?

Before deciding the ideal lot size, you need to know:

1. How far your stop-loss is going to be.
2. How much you are going to risk on each trade.

Let us assume a balance of $1,000. You are willing to risk a maximum of 2 % of your balance per trade, which is $20. You have identified a trade that requires a stop loss of 40 pips. Since the maximum amount of money, you are willing to risk on this trade is $20, you would open a 0.05 lot size trade, since 1 pip of a 0.05 trade is worth 0.50 cents (i.e., 0.50 x 40 = $20).

A wider stop loss will require you to reduce your lot size or adding more funds to your account if you wish to maintain the 2 % maximum loss rule.

You can allocate a greater risk percentage if you have a high level of confidence in a trade setup. Begin with a conservative risk level (approximately 0.5%) for simple setups, and gradually raise it to a maximum of 2% for trades with strong conviction. This cautious approach helps mitigate potential losses while taking advantage of promising opportunities.