Risk per trade: the 1-2% rule
Compare two accounts on the same losing run
Two accounts each hold KSh 129,000. Both take the same twenty trades. One risks 1 per cent per trade, which is KSh 1,290. The other risks 20 per cent per trade, which is KSh 25,800. The first loses KSh 25,800 over the run and still holds KSh 103,200. The second is wiped out.
The difference is not the market. Both accounts saw the same prices. The difference is the number chosen before the first trade. A smaller risk per trade means each loss removes a smaller share of the account. A larger risk means one bad run removes the account itself.
The 1 per cent account can survive a run of twenty losses. The 20 per cent account cannot survive five. Five losses of KSh 25,800 equal KSh 129,000. That is the whole account. The same five losses cost the 1 per cent account KSh 6,450, leaving KSh 122,550.
This comparison shows why the risk number comes first. It is not a preference. It is the difference between having an account after a bad month and not having one.
Work out the stop distance before the lot size
The stop distance is how far the price must move against you before you close the trade. On EUR/USD, that distance is measured in pips. A pip is the fourth decimal place in the price. If EUR/USD is at 1.0850 and your stop is at 1.0830, the distance is 20 pips.
You find the stop distance from the chart. You look at recent price movement and place the stop where the trade idea is proven wrong. That distance is not chosen to fit your money. It is chosen because the chart says so. The money is chosen first, then the stop distance is read from the chart, then the lot size is calculated.
If the stop distance is 20 pips and you may lose KSh 1,290, then each pip may cost KSh 64.50. One standard lot on EUR/USD costs about KSh 12.90 per pip at 129 shillings to the dollar. So the lot size that fits is 64.50 divided by 12.90, which is 0.05 of a standard lot.
If the stop distance were 40 pips instead, each pip may cost KSh 32.25. The lot size that fits is 32.25 divided by 12.90, which is 0.025 of a standard lot. A wider stop means a smaller lot for the same risk. The money stays the same. The size changes.
Adjust the number when the account changes
The 1 to 2 per cent rule uses the current account balance, not the starting balance. If the account falls to KSh 103,200, 1 per cent is KSh 1,032. The next trade risks less. If the account grows to KSh 150,000, 1 per cent is KSh 1,500. The next trade risks more.
This adjustment is automatic. You recalculate the risk amount before each trade. You do not keep using the old number. An account that shrinks and still risks the old amount is risking a larger percentage than intended. An account that grows and still risks the old amount is risking a smaller percentage than intended.
The broker may round lot sizes to the nearest 0.01. The broker may also charge a spread on entry and exit, and may add a commission or a swap. Those costs vary between brokers and are not included in the examples above. They reduce the amount that fits.
If the calculated lot size is smaller than the minimum the broker allows, the trade is too big for the account. The correct action is to leave it. The number you can lose is the first decision. If the market does not offer a stop distance that fits that number, there is no trade.
Two accounts, twenty trades, one per cent against twenty per cent
| Step | Amount | Note |
|---|---|---|
| Starting balance | KSh 129,000 | A deposit of USD 1,000 converted at about KSh 129 to the dollar. The rate moves, so the shilling figure moves with it. |
| Risk per trade at 1 per cent | KSh 1,290 | 129,000 multiplied by 0.01. |
| Risk per trade at 20 per cent | KSh 25,800 | 129,000 multiplied by 0.20. |
| Losses in the run | 12 of 20 trades | A losing run of this length happens to most people at some point. It is not unusual. |
| Balance after 12 losses at 1 per cent | KSh 113,520 | 1,290 multiplied by 12 is 15,480. 129,000 minus 15,480. |
| Balance after 12 losses at 20 per cent | KSh -180,600 | 25,800 multiplied by 12 is 309,600, which is more than the account holds. The account is gone before the run ends. |
The broker may round lot sizes, charge a spread on entry and exit, and add a commission or swap. Those costs vary between brokers and are not included above.
Doing it once, step by step
These steps show how to set the risk amount, find the stop distance, and calculate the lot size for one trade. Follow them in order before you place any order.
- 01
Choose the risk percentage
Decide what share of the account you are willing to lose on this one trade. A common starting range is 1 to 2 per cent. Write the percentage down before you look at the chart. This number does not change because a trade looks especially good.
- 02
Convert the percentage to shillings
Multiply the account balance by the percentage written as a decimal. For KSh 129,000 and 1 per cent, multiply 129,000 by 0.01. The result is KSh 1,290. This is the maximum loss for the trade, including costs where possible.
- 03
Find the stop distance on the chart
Look at recent price movement on EUR/USD and place the stop where the trade idea is proven wrong. Measure the distance in pips. If the entry is 1.0850 and the stop is 1.0830, the distance is 20 pips. Do not move the stop closer just to fit a larger lot.
- 04
Calculate the pip value allowed
Divide the risk in shillings by the stop distance in pips. For KSh 1,290 and 20 pips, the result is KSh 64.50 per pip. This is the most each pip may cost on this trade. If the stop were 40 pips, the allowed pip value would be KSh 32.25.
- 05
Convert to lot size
Divide the allowed pip value by the pip value of one standard lot. One standard lot on EUR/USD costs about KSh 12.90 per pip at 129 shillings to the dollar. For KSh 64.50, the result is 0.05 of a standard lot. Round down to the nearest size the broker allows.
- 06
Check the minimum and decide
Compare the calculated lot size with the minimum the broker allows. If the calculated size is smaller than the minimum, the trade is too big for the account. Leave it and look for another trade. If it fits, place the order with the stop at the distance you measured.
The mistake most people make here
The common mistake is to pick a lot size first because it looks affordable, then place the stop wherever the chart seems to allow. That reverses the order. The stop distance and the lot size together decide the loss, so the loss is set by accident rather than by choice. Decide the money first, then find the stop distance from the chart, then work out the lot size that fits. If the number that fits is smaller than the minimum the broker allows, the trade is too big for the account and should be left alone.Check yourself
An account holds KSh 129,000. You risk 1 per cent on one trade. The stop is 20 pips away on EUR/USD. One pip on one standard lot is 10 units of the quote currency, which is about KSh 1,290 at 129 shillings to the dollar. What lot size fits?
Risk is 129,000 multiplied by 0.01, which is KSh 1,290. One pip on one standard lot costs about KSh 12.90. The stop is 20 pips, so one standard lot would lose 20 multiplied by 12.90, which is KSh 258. That is more than 1,290 divided by 258, so the size that fits is about 0.05 of a standard lot.
The same account risks 5 per cent instead. What is the loss per trade in shillings, and how many such losses would empty the account?
5 per cent of 129,000 is KSh 6,450. Twenty losses of 6,450 would be 129,000, so twenty losses in a row would take the account to zero. At 1 per cent the same twenty losses leave KSh 103,200.
Questions that come up next
Why does the risk number come before the lot size?
The lot size and the stop distance together decide the loss. If you pick the lot size first because it looks affordable, the stop has to go wherever the loss allows, not where the chart says. The loss is then set by accident. Choosing the money first makes the loss a decision you made.
How do I find the stop distance from the chart?
Look at recent price movement and place the stop where your trade idea is proven wrong. That distance is read in pips. It is not chosen to fit your money. On EUR/USD, a stop 20 pips from entry is 20 pips of risk for every lot you hold.
What happens if the lot size that fits is below the broker minimum?
The trade is too big for the account. The broker sets a smallest lot size, and if the size that fits your risk is smaller than that, there is no size you can take. Leave the trade alone. The alternative is to risk more than your chosen number, which is the mistake the rule exists to prevent.
Does the rule use my starting balance or my current balance?
Use the current balance. If the account falls to KSh 103,200, 1 per cent is KSh 1,032, not KSh 1,290. Risking the same shilling amount after a loss takes a larger share of a smaller account. Recalculating keeps the share steady.
Do spreads, commissions and swaps change the number?
They add to the cost of the trade, so the real loss is larger than the stop distance alone suggests. Spread is charged on entry and exit, and a commission or swap may be added. These costs vary between brokers. The figures in this lesson do not include them.
Why does 20 per cent per trade empty the account so quickly?
Twenty per cent of KSh 129,000 is KSh 25,800. Five losses of that amount equal the whole account. At 1 per cent, the same five losses cost KSh 6,450 and leave KSh 122,550. The market prices were the same in both cases. Only the number chosen before the first trade differed.
The words used on this page
- Pip
- The fourth decimal place in a currency price. If EUR/USD moves from 1.0850 to 1.0830, the price moved 20 pips. Stop distances on this pair are usually counted in pips.
- Lot size
- The amount of currency in one trade. One standard lot on EUR/USD costs about KSh 12.90 per pip at 129 shillings to the dollar. A smaller lot means a smaller loss for the same stop distance.
- Stop distance
- How far the price must move against you before you close the trade. It is measured in pips and read from the chart. It is not chosen to fit your money.
- Risk per trade
- The money you are willing to lose if one trade goes against you. It is set as a share of the current account balance, often 1 to 2 per cent. Every other number on the trade follows from it.
- Account balance
- The money currently in the trading account. The risk number is a share of this balance, not of the amount you started with. It changes after every win and loss.
What to take away
- Choose the money you can lose on one trade before you choose anything else.
- Read the stop distance from the chart, then work out the lot size that fits the money.
- If the size that fits is below the broker minimum, the trade is too big for the account.
- Use the current balance, and remember that spread, commission and swap vary between brokers and add to the cost.