Learn Risk Management In Forex Trading: Risk Per Trade

The Investor Diary Entry #71: January 28, 2025

In my journey of knowing how to learn risk management in Forex Trading, learning the concept of risk per trade was one of the most crucial moments.

This turned my trading into a completely different dimension. I have become extremely strict in following this rule. I will never enter a trade before making sure that I am only risking the percentage that I have set for myself.

For me, risk management is the cornerstone of successful forex trading. I understand that many traders focus on strategy and analysis, and I respect that, but it is often risk management that determines whether they achieve long-term success. In this diary entry, I want to share my personal journey and discoveries around risk per trade and how refining this aspect of my trading approach has transformed my results.

Understanding Risk Per Trade

Risk per trade is a fundamental concept in forex trading that helps protect your account from significant losses while allowing for steady growth. It refers to the amount of your trading capital you are willing to risk on a single trade. This approach ensures that no single loss can wipe out a substantial portion of your account, preserving your ability to trade consistently over time.

Experts often recommend risking only a small percentage of your trading account on each trade. For instance, BabyPips advises traders to “not lose their shirt” by limiting risk to 2% per trade or even less, especially for beginners. By adopting such a disciplined approach, you can weather losing streaks without jeopardizing your long-term profitability.

I used to follow the 2% risk per trade, but I realized that for now this is a lot. In my own trading, I’ve refined my risk management rules by unifying the risk per trade to 1% of my account balance. This ensures that all trades are evaluated with the same level of risk while allowing me to focus on identifying high-probability setups rather than varying the risk based on confirmations alone. This will be explained further in the examples below.

My Initial Risk Management Strategy

When I first started implementing risk management rules in my trading, I developed a scoring system to evaluate each trade based on the number of confirmations:

• 1–2 Confirmations: 50% confidence, with a trade risk of 0.5%.
• 3 Confirmations: 70% confidence, with a trade risk of 1%.
• More than 3 Confirmations: 80% confidence, with a trade risk of 2%.

The idea was simple: the more confirmations a trade setup had, the higher the confidence level and the greater the risk I was willing to allocate. While this system initially felt logical, I started noticing some inconsistencies in my results. For example, some trades with only 0.5% risk were winning, while 1% or even 2% risk trades were losing. Over time, this variance negatively impacted my bottom line.

The Turning Point

After analyzing my trading performance, I realized that adjusting risk based on trade confidence was creating more problems than it solved. It added unnecessary complexity and skewed the consistency of my results. To address this, I decided to simplify my approach:

1. Unified Risk Per Trade: I standardized the risk per trade to 1% of my current account balance, regardless of the trade’s confidence level.
2. Scoring for Analysis Only: I retained the scoring system but used it solely for analyzing the quality of trade setups, not for determining risk allocation.

This change had an immediate impact. By unifying the risk, I created a more consistent risk management framework that allowed me to focus on the quality of my trades rather than juggling different risk levels.

New Risk Management Rules

Here’s the updated framework I’ve adopted to manage risk effectively:

1. Risk Per Trade: Always 1% of my current balance, not the original invested capital. This ensures that my risk dynamically adjusts with my account growth or decline.
2. Open Trades Limit: I never have more than three trades open simultaneously to avoid overexposure.
3. Weekly Loss Limit: If my balance drops by 5% or more in a week, I stop trading immediately and reassess my strategy.
4. Weekly Profit Goal: When I reach 5% profit on my balance during a week, I stop trading and celebrate the achievement.

This disciplined approach ties directly to my financial goal of achieving 20% profit per month. By sticking to these rules, I’ve minimized emotional decision-making and built a trading routine that prioritizes sustainability over short-term gains.

Calculating Risk Per Trade: An Example

Let’s walk through an example to illustrate how my methodology for calculating risk per trade works and how it adjusts with account growth or decline. Assume an initial invested capital of $1,000:

1. Initial Balance:
   • Account Balance: $1,000
   • Risk Per Trade: 1% of $1,000 = $10
   • For each trade, I risk $10, regardless of the confidence level.
2. After a Winning Trade:
   • Let’s say the trade generates a 2% return, increasing the balance by $20.
   • New Account Balance: $1,020
   • Updated Risk Per Trade: 1% of $1,020 = $10.20
   • With the higher balance, my risk slightly increases to reflect the growth.
3. After a Losing Trade:
   • If the next trade results in a 1% loss, the balance decreases by $10.20.
   • New Account Balance: $1,009.80
   • Updated Risk Per Trade: 1% of $1,009.80 = $10.10
   • The risk per trade adjusts downward, ensuring I’m not risking more than my account can handle.
4. Cumulative Losses:
   • If my account experiences a 5% loss in a week, I pause trading.
   • Example: $1,000 − 5% = $950. At this point, I stop trading and reassess my strategy.
5. Weekly Profit Target:
   • If my account grows by 5% in a week, I achieve my goal.
   • Example: $1,000 × 1.05 = $1,050. I stop trading for the week and enjoy the milestone.

By recalculating the risk per trade after each win or loss, I ensure that my trading remains sustainable, even during periods of volatility.

For my calculations, I also use a platform to make sure that my results are accurate. The platform is Cashbackforex.com.

Lessons Learned

This journey has taught me several valuable lessons about risk management in forex trading:

1. Consistency Is Key: A unified risk per trade eliminates unnecessary variables and ensures a steady approach to capital management.
2. Celebrate Small Wins: Stopping after achieving weekly profit goals prevents overtrading and reinforces positive habits.
3. Adaptability Matters: Calculating risk based on the current balance, rather than the original capital, ensures my strategy evolves with my account.

Most importantly, I’ve realized that risk management isn’t just about protecting your capital—it’s about creating a framework that supports long-term growth.

Final Thoughts

If you’re struggling with inconsistencies in your trading performance, take a closer look at your risk management rules. Simplifying your approach, as I did with my unified risk per trade, can make a significant difference. Remember, the goal isn’t just to win individual trades but to achieve sustainable success over time.

What strategies do you use to manage your risk in forex trading? Share your thoughts in the comments below, and let’s learn from each other’s experiences.

If you want to follow the series here is the sequence.

How To Learn Risk Management in Forex Trading

List Your Financial Goals

The Psychology of Risk

Risk Per Trade (This Article)

We are still adding to the series

The Investor

Tuesday 28 January 2025

About The Author

I started to look into individual stocks in January 2022. I created this diary initially for myself to track my investing progress, and second, as a place where I can share my ideas publicly hoping that others will share their ideas and learn from each other, and lastly as an online business where some links that I share are affiliate links, and if anybody bought anything by clicking those links, I will get a commission based on that successful sale, which of course will not affect the price that you are buying the product or service at.

For more detailed information on my affiliate disclosure please refer to the Full Affiliate Disclosure page.

Furthermore, this site is in no way or form giving any financial or investing advice, nor it is encouraging or discouraging people to buy or sell any financial instrument. This is a personal diary in which I track my own progress and share it for informational, educational, and entertainment purposes.