Risk management for currency traders

Most trading accounts are not destroyed by one bad idea, but by sizing positions too large for the losses that inevitably come. Risk management is about surviving long enough for a strategy’s edge, if it has one, to show.

Risk a small, fixed share per trade

A common rule of thumb is to risk no more than 1 to 2 percent of the account on any single trade. With a 10,000-dollar account and 1 percent risk, a stopped-out trade costs 100 dollars. Ten losses in a row, which happens to every strategy eventually, cost about 10 percent, painful but recoverable.

Size from the stop, not the other way round

Decide where the trade is wrong first, then set the position size so that being wrong costs your fixed amount. A wider stop means a smaller position. The position size calculator does the arithmetic.

The maths of recovering

• Lose 10 percent and you need 11 percent to get back to even.
• Lose 25 percent and you need 33 percent.
• Lose 50 percent and you need 100 percent.

Large drawdowns are disproportionately hard to recover from, which is why limiting each loss matters more than maximising each win.

Expect losing streaks

Every backtest in our strategy library reports the longest losing streak and the largest drawdown. Trend-following strategies with win rates under 40 percent routinely string together six or seven losers. If you would abandon a strategy after a streak it has historically produced, the position size is too large for you.

Keep a record

Write down every trade: why you took it, the size, the stop and the result. Over time the record shows whether losses come from the strategy or from not following it.