Yes, risk management is one of the most (if not the most) important topics you’ll read about trading. Yet, many forex traders are comfortable getting into trading without regard to their total account size. They simply determine how much loss they can stomach in a single trade and hit the “trade” button.
At Optimal, we are committed to promoting healthy trading and do not recommend this strategy.
Sun Tzu, a popular Chinese military general once said: "Every battle is won before it is fought." This is very true in trading.
If you don't "plan the trade and trade the plan," the market will dismantle you.
This blog will explore risk management in trading. We’ll see why it's important and the best tips to develop good risk management.
What’s Risk Management in Trading?
Risk management is identifying and controlling potential losses to maximise profit opportunities.
It involves setting clear risk measures like stop-loss orders and diversifying investments to reduce exposure to any asset or market.
The risk of losses happens when the market goes against what we expect. What drives these market moves are investor sentiments or feelings. The sentiment changes based on political events such as elections, economic events such as interest rates, or business events such as new technology.
Why is Risk Management So Important?
Risk management is important because trading is a game of numbers and probability. There is no way to avoid risk.
In fact, you should approach every trade knowing it could, theoretically, result in a loss. Many traders, however, overlook this and focus only on the profit side.
Did you know a successful trader can still be profitable, even if they experience more losing trades than winning ones? This is possible if the profit of their winners exceeds their losses.
Meanwhile, a trader who wins most of the time can still lose money. If their small profits are overshadowed by letting losing trades run too long this will eventually happen.
For that reason, whether you are a full-time trader or not, you'll have to protect your capital. This means tilting every little factor in your favour as much as possible.
And without a solid risk management strategy, this will NEVER happen!
Here are 7 proven ways to use risk management to tip the odds in your favour.
7 Proven Risk Management Tips For All Traders
Plan Your Trades
As mentioned earlier, if you want more wins, every trade should start with a clear and detailed plan. This means identifying your entry and exit points, and the amount you're willing to risk. This way, you'll avoid making impulsive decisions, even when market conditions become unpredictable.
Implement the One-percent Rule
The one-percent rule is simple–your risk per trade should not exceed 1%. For example, if you have $10,000, you should only risk $100 per trade.
Since many traders struggle with the appropriate risk, this rule can clear this doubt.
The best part is that even if you experience multiple losses in a row–which is very much possible in trading, you will still have enough capital to recover.
Consider Becoming a Funded Trader
Trading requires a sustainable amount of capital. But most small account holders($100 or less than $1,000), often try to flip them to achieve large profits quickly. The only way to do this is to take larger positions than they should or open multiple positions that their accounts can’t sustain. This can cause frequent account blowouts.
Instead of taking such risks, the best thing(if you are confident with your skills) is to use those funds to buy an evaluation with a reliable prop firm and become a funded trader. This way you'll take lower risks, achieve better returns, and use the experience to build your own capital.
Set Stop-Losses and Take-Profits
Assuming the market moves against you a stop-loss automatically exits you out of a trade to prevent further losses. It can help you avoid the "it will return to my favour" mentality, which can escalate losses.
On the other hand, a take-profit locks in your profits when a trade reaches your target. It’s useful when resistance levels or other market factors limit the potential for further upside.
Maintain a Positive Risk-to-Reward Ratio
The goal is without a doubt, to make money. But how do you expect consistent profitability if you risk more than you get?
A positive risk-to-reward means your reward should be greater than your risk. So, avoid closing your trades as soon as they are in blue.
You can still achieve consistent profitability, even if you experience multiple losses if you have a positive risk-to-reward ratio. Risking $1 to make $1 or less is not worth the risk because it’s unsustainable.
A good risk management practice is ensuring your risk-to-reward is at least 1:2.
Watch Out for High-Impact News
There is a reason most prop firms prohibit news trading, such as during the release of the Consumer Price Index (CPI). It’s because these events can quickly reverse market trends, turning profitable trades into losses—even when the reports have positive feedback.
If you don’t want to get caught up in the same chaos, always monitor key news events and trade accordingly.
If necessary, stay on the sidelines until the market stabilises.
Keep Emotions at Bay
Emotional trading is one of the biggest challenges for traders. Fear, greed, and overconfidence can cloud judgment, leading to hasty decisions–such as increasing trade sizes after a few wins. This hastiness can cost you dearly, which is why you should focus on maintaining a consistent risk framework at all times.
The Bottom Line
Losing money in trading is inevitable. But with solid risk management, you can prevent losses from spiralling out of control.
All you need is a well-thought-out trading plan that considers win-loss ratios, minimises losses and follows disciplined execution to stay in the game. This approach can help avoid catastrophic losses, particularly during high-impact news events.
Above all, don’t forget to keep your emotions in check—staying level-headed is critical for long-term success.
