You agree with yourself to risk at most 1% of your account on one trade. With a € 5,000 account that is € 50. It is a common rule of thumb, not a law. What suits you depends on your experience and how much risk you can accept. Many beginners start with a lower percentage.

What is the difference between a mental stop and a stop-loss order?

A stop-loss order sits with your broker and runs automatically when the price reaches your level. A mental stop only exists in your head, so you have to sell yourself at that moment, which is hard when the price falls fast. An order helps against hesitation. Note that in fast markets the fill price can be worse than your stop.

What risk/reward ratio makes sense?

It depends on how often your strategy wins. With a 2:1 ratio (you aim for € 2 of profit per € 1 of risk) you need to win roughly 1 in 3 trades to break even, before costs. Costs and slippage raise that number. Test your approach on paper before you trade with real money.

How many positions can I hold at once?

That is personal. Keep an eye on the total risk across all open positions. With 1% per trade and 5 positions, your worst case is 5% at risk. Also watch for overlap: positions in the same sector can fall together and then behave like one large position.

When should I move my stop to my entry price?

There is no fixed rule. Move it too early and normal price swings stop you out. Wait too long and a winner can still turn into a loser. Decide your rule in advance, write it down and test it in your journal.

Risk Management Basics: Protect Your Trading Capital

Risk management means deciding in advance the most you can lose on one trade. That keeps a losing streak manageable and lets you keep trading.

Why risk management?

Every trader loses sometimes. What matters is how big the losses are. A small loss is easy to recover from. A big one is not: after a 50% drop, your account has to rise 100% to get back to where it started. You can see how this works in the drawdown recovery calculator.

So answer three questions before you open a trade:

How many euros am I willing to lose?
At what price is my idea wrong (my stop)?
How many shares or units can I then buy?

Step 1: set your maximum risk per trade

Many traders choose a fixed percentage of their account, often 1%. This is a rule of thumb, not a guarantee and not advice. With a € 5,000 account, 1% is € 50.

Why a small percentage? Take a run of 20 losing trades. At 1% risk per trade you keep about 81.8% of your account. At 10% risk per trade, 7 losses leave you with about 47.8%. Such runs are rare, but small risks give you room to survive mistakes.

Step 2: set your stop-loss

A stop-loss is the price at which you close the position if your idea does not work out. Base it on the chart, for example just below a support level, and not on how many shares you would like to buy.

A stop-loss order with your broker sells automatically. Note that in fast markets or when the price gaps, the fill can be worse than your stop. Your loss can then be larger than planned.

Step 3: calculate your position size

The formula is:

number of shares = maximum risk in euros ÷ (entry price − stop price)

Example with a € 5,000 account:

Maximum risk: 1% of € 5,000 = € 50
Entry price: € 20, stop: € 18, so € 2 risk per share
Number of shares: € 50 ÷ € 2 = 25 shares
Check: 25 × € 2 = € 50 at risk. The position is 25 × € 20 = € 500.

A second example with € 10,000: 1% is € 100. Entry € 100, stop € 95, so € 5 risk per share. € 100 ÷ € 5 = 20 shares. Try your own numbers in the position size calculator or the risk per trade calculator.

Always round down. Also allow for costs and for the chance that a stop does not fill exactly.

Step 4: look at the risk/reward ratio

Besides your risk, you also choose a target price. The ratio between what you could gain and what you risk is the risk/reward ratio.

Example: you buy at € 100 with a stop at € 95 and a target at € 110.

Risk per share: € 5
Possible profit per share: € 10
Ratio: € 10 ÷ € 5 = 2:1

The higher the ratio, the less often you need to win to break even. At 2:1 that is about 1 in 3 trades (33.3%), before costs. At 1:1 it is 1 in 2 (50%). Always check this against your own results. A nice ratio on paper does not help if the target is rarely reached. See more in Risk and Reward in Balance and the risk/reward calculator.

Several positions at once

Add up the risk of all your open positions. Five positions with 1% risk each means at most 5% at risk if every stop is hit.

Watch correlation. If you hold five shares from the same sector, they can fall together on the same news. In practice you then have one big position. Read more in Portfolio Basics: Spreading Risk.

Step-by-step plan

Choose your maximum risk per trade, for example 1% of your account.
Before you enter, set your entry price, stop and target.
Calculate your position size with the formula above.
Place the stop-loss order right after you enter.
Record every trade in a trading journal.
Check weekly whether you really stayed within your risk limit.

Common mistakes

Moving the stop further away because the price is getting close.
Raising your stake after a loss to win it back.
Choosing a stop to fit the number of shares you want, instead of fitting the chart.
Forgetting that costs and price gaps make your real loss larger.

Work it out yourself

Open the full calculator →

Risk per trade

Test yourself

Practice questions to check your understanding, not advice.

Your account is € 5,000 and you choose 1% maximum risk per trade. How many euros is that?
- € 5
- € 50
- € 500
Show answer
Answer:B. € 50
1% of € 5,000 is € 50. This is the most you are willing to lose on that trade (step 1 in the tutorial).
Maximum risk is € 60. You buy at € 30 with a stop at € 28. How many shares can you buy using the formula?
- 15 shares
- 30 shares
- 60 shares
Show answer
Answer:B. 30 shares
Risk per share is € 30 − € 28 = € 2. Number of shares = € 60 ÷ € 2 = 30.
Your account falls 50%. How much must it rise afterwards to get back to your starting amount?
- 50%
- 75%
- 100%
Show answer
Answer:C. 100%
After a 50% fall you need a 100% rise to get back to your starting amount. That is why you keep losses small.
With a risk/reward ratio of 2:1 (before costs): what percentage of your trades must you win to break even?
- About 33.3%
- 50%
- About 66.7%
Show answer
Answer:A. About 33.3%
At 2:1 you need to win about 1 in 3 trades (1 ÷ (1 + 2) = 33.3%), before costs.
You have 5 open positions, each with 1% risk. What is the maximum total risk if all stops are hit?
- 1%
- 2%
- 5%
Show answer
Answer:C. 5%
You add up the risk of open positions: 5 × 1% = 5%. Positions in the same sector count almost as one position.

Frequently asked questions

What is the 1% rule?: You agree with yourself to risk at most 1% of your account on one trade. With a € 5,000 account that is € 50. It is a common rule of thumb, not a law. What suits you depends on your experience and how much risk you can accept. Many beginners start with a lower percentage.
What is the difference between a mental stop and a stop-loss order?: A stop-loss order sits with your broker and runs automatically when the price reaches your level. A mental stop only exists in your head, so you have to sell yourself at that moment, which is hard when the price falls fast. An order helps against hesitation. Note that in fast markets the fill price can be worse than your stop.
What risk/reward ratio makes sense?: It depends on how often your strategy wins. With a 2:1 ratio (you aim for € 2 of profit per € 1 of risk) you need to win roughly 1 in 3 trades to break even, before costs. Costs and slippage raise that number. Test your approach on paper before you trade with real money.
How many positions can I hold at once?: That is personal. Keep an eye on the total risk across all open positions. With 1% per trade and 5 positions, your worst case is 5% at risk. Also watch for overlap: positions in the same sector can fall together and then behave like one large position.
When should I move my stop to my entry price?: There is no fixed rule. Move it too early and normal price swings stop you out. Wait too long and a winner can still turn into a loser. Decide your rule in advance, write it down and test it in your journal.