Why risk management comes first
No method tells you the outcome of every trade, and losing trades are a normal part of trading. Risk management tries to stop a single trade, or a bad run, from putting the whole account at risk. Asking how much could be lost before asking how much could be gained is the core of this approach.
Risk per trade
Risk per trade is the amount that would be lost if a trade reached its stop-loss level. Defining it as a small, fixed share of the account balance limits the effect of a series of losses. The share itself is a personal decision; in this approach it is set at an amount whose loss would not affect daily life.
Position size
Position size is calculated from the risk amount per trade and the distance between the entry price and the stop-loss level. A wider distance means a smaller position for the same risk amount, and a narrower one a larger position. That keeps risk within a limit set in advance, regardless of how the market looks at the moment.
Stop loss and take profit
A stop-loss order closes a position when the price reaches a set level, and a take-profit order closes it at a target level. In fast markets and on gaps, a stop-loss order can be filled at a price different from the level set. These orders help limit risk, but they do not remove it.
Risk/reward ratio
The risk/reward ratio shows the relationship between the possible loss and the targeted profit. On its own, the ratio does not say whether a trade is good; the likelihood of reaching the target matters too. Writing the ratio down before each trade makes it easier to review decisions later.
Example: position size
Suppose, hypothetically, an account balance of 10,000 US dollars and a risk of 1% per trade, which makes the risk amount 100 US dollars. If the stop loss on EUR/USD is 50 pips from the entry, 2 US dollars per pip, or 0.2 lots, fits that limit. The numbers only illustrate the calculation; because of slippage, a real loss can be larger.
Risk management helps limit losses, but it does not prevent them. Trading leveraged products carries a high level of risk, and you can lose all of the money you deposit.
Read the risk disclosure