Understanding risk and reward
Understanding the risk vs reward ratio
If you haven’t yet watched the video at the beginning of this course, we recommend you do so before continuing with this lesson.
Choosing how much to risk per trade is all about your personal circumstances. Some experts advise not to risk more than 1% of your trading capital per trade, while others say it’s acceptable to go up to 10%. Most traders agree not to go much higher than that though, and here’s why.
Did you know?
Trading capital isn't just how much you risk on a trade, but everything in your trading account, including any existing open positions.
If you’re on a big losing streak, the amount you’re risking per trade will have a huge effect on your capital and the ability to claw back your losses. Say you’ve got $10,000 of trading capital and you’re unlucky enough to lose 15 trades in a row. Here’s the difference between risking 2%, 5% or 10% per trade:
- With 2% risk per trade, you’d lose less than 25% of your trading capital, even after 15 unsuccessful trades. It’s conceivable that you could earn this money back
- However, if you opted for 5% risk per trade, you’d lose over half of your initial trading capital. You’d have to more than double this amount to get back to your original level
- With 10% risk per trade, things would be even worse. You’d be down over 75%, making it extremely difficult to make back the money you’ve lost
Lesson summary
- A single bad trade could wipe out your capital if you accept excessive risk
- Control the amount of risk you take on each trade
- Risk no more than 1-5% of your trading capital on any single idea
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