Risk management: the whole account

Risk management does not try to avoid losing trades. Losses are the cost of participating and no method removes them.

What it does is decide, in advance, how much any single trade and any single week can take out of the account. A good strategy with no risk framework will eventually meet the run of losses that ends it. A weak strategy with a perfect one just loses more slowly - risk management controls consequences, it does not create an edge.

The three questions the other guides answer

How big should this position be is position sizing: risk amount divided by stop distance, in that order and not the other way round.

What relationship between risk and reward does the method need is risk and reward, and the short version is that win rate on its own tells you nothing.

Are these positions actually separate is diversification, and the answer is usually less than it looks.

This article is about what none of those cover: the account as a whole.

Why drawdowns are not symmetrical

This is the arithmetic that makes the case for small positions better than any argument can. Losses and the gains needed to undo them are not the same size.

Lose half and you must double what remains simply to break even. Not double your original account: double the reduced one. This is why controlling the depth of a drawdown matters more than the speed of a recovery.

Ten losses in a row, at two position sizes

A strategy winning 60% of the time still loses 40% of the time, and across hundreds of trades those losses will cluster. Ten consecutive is unusual, not impossible, and the framework has to survive it.

Margin is what the broker requires to open the position. It has never been a limit on what you can lose.

What the account actually depends on

Two figures from our hundred broker records that decide how bad the worst case can be.

• 45confirm negative balance protection outrightPlus a further eighteen confirming it for retail clients or subject to entity. It is common, not universal.
• 12state they do not offer itOn those accounts, an extreme gap can leave you owing the broker money.
• 1:30 → 1:3000the leverage range in our recordsTwenty-seven cap retail at 1:30. Nineteen offer 1:1000, five offer 1:3000.

The leverage figure is a ceiling, not an instruction. Nothing obliges you to use a hundredth of it, and [what is leverage](/insights/trading-basics/what-is-leverage/) covers why the maximum is the least interesting number on the page.

Effective leverage is the number that matters

A broker offering 1:500 is describing a limit. What you are actually running is your exposure divided by your equity.

A $20,000 account holding a $40,000 position is at 2:1, whatever the broker permits. The same account holding $600,000 is at 30:1, and a 1% adverse move takes 30% of the account.

Nobody is ever forced into high effective leverage. It is chosen, usually gradually, by taking slightly larger positions during a good run.

The loss limit, and what it is actually for

A maximum daily loss - say 3% of the account - stops trading for the day once reached. A weekly version does the same over a longer window.

The purpose is not the arithmetic. Losing 3% is survivable; the framework already handles that. The purpose is to interrupt the sequence that follows a bad session, when the impulse is to make it back before the day closes.

That impulse produces bigger positions on worse setups, and it is how an ordinary bad day becomes the worst month of the year. A limit set in advance is a decision made by somebody who was not upset at the time.

Increasing size after losses

Martingale-style approaches double the position after each loss on the reasoning that a winner eventually recovers everything. Here is what the ladder actually looks like from $100.

By the seventh trade you are risking sixty-four times the original amount to recover $6,300 already lost. The strategy does not fail because the logic is wrong. It fails because capital and margin run out before the winning trade arrives.

Stress testing, briefly

Position sizing assumes the stop fills where you put it. Sometimes it does not, and the useful exercise is to ask what happens when several things go slightly wrong at once.

Five open positions, each risking 1% of a $20,000 account, is $1,000 of planned risk. Now assume a news event gaps the market, every stop slips, and the actual combined loss is $1,300. Is that survivable? Almost certainly.

Run the same exercise with five positions at 5% each and the answer changes completely. Planned risk of $5,000 becomes something closer to $6,500, which is a third of the account gone in a single session on trades that were all individually within the rules.

Before every trade

The first four are arithmetic. The last two are the ones that actually get skipped.

• What price proves this idea wrong, and therefore where does the stop go?
• What position size does that stop distance allow at my risk limit?
• What is my total open risk across everything, if this trade is added?
• Do my open positions share a currency or a driver on the same side?
• Is major scheduled data due while I expect to be holding?
• Am I sizing this up because of a previous loss?

Common questions