The Formula
Risk calculation is straightforward: Position size × Distance to stop-loss = Amount at risk. If you buy 1 lot of EUR/USD at 1.0850 with a stop-loss at 1.0820, your risk is 30 pips × £10 per pip = £300. That's the maximum you lose if the trade goes against you.
Every trade you take should have this number calculated before you click the button. Not after. Not roughly. Exactly.
The 1-2% Rule
A widely followed principle: never risk more than 1-2% of your total account balance on a single trade. On a £10,000 account, that's £100-£200 per trade. This sounds small, but it's the key to survival. Even with 10 consecutive losses (which happens to every trader eventually), you've only lost 10-20% of your account — painful, but recoverable.
Risk 10% per trade, and five losses in a row halves your account. Recovery from that point is extremely difficult psychologically and mathematically.
Working Backwards from Risk
The smart approach: start with how much you're willing to lose, then calculate position size accordingly. If your maximum risk is £200 and your stop-loss is 40 pips away, your position size should be £200 ÷ 40 = £5 per pip. This is the opposite of what many beginners do — choosing a position size first and then hoping the stop-loss is close enough.
Account for the Spread
Don't forget that the spread is part of your cost. If your stop-loss is 30 pips and the spread is 2 pips, your effective risk is 32 pips. On instruments with wider spreads, this matters more. Always factor the spread into your risk calculation.
Key Takeaways
- Calculate your exact risk in pounds before every trade
- Never risk more than 1-2% of your account on a single position
- Work backwards: decide your risk amount first, then calculate position size
- Factor the spread into your stop-loss distance
- This single habit is the foundation of long-term survival in trading
