Forex Risk Management

Surely, you must have read it countless times: never risk more than 2% of your equity in forex.

But what exactly does it mean? How do you compute that and translate it into number of lots, which is how traders speak the language of forex?

Let’s assume that you have USD 10,000 of equity in your mini-account. And you intend to risk only 2% of your equity as your capital management guideline.

This is how you compute it.

USD 5,000 x 2% = USD 100

So, it means that you should only be exposing USD 200 with any trade that you make with your mini-account.

And since it is a mini-account, you are trading with 10k lots, and let’s assume that your leverage is 1:200, the usual forex leverage given by forex brokers.

Using basic algebra:

1 / 200 leverage = x / 10k lot
where x is the amount you risk per lot you trade with this mini-account

200x = 10k
x = 10k/200
x = 50

You, then, apply this with the amount you are willing to risk based on the size of your account based on our earlier computation.

Total lots to be risked = Total USD amount to risk / Risk per lot

Total lots to be risked = USD 100 / 50

Total lots to be risked = 2 lots

That is how you compute for the number of lots you should open based on the amount of risk you are willing to take. But bear in mind that this is the total number of lots that should be opened based on a USD 5,000 equity. The 2 lots can be divided into 1= two 1 lots trades. Or if your account allows micro-lots, the total number of lots open for any given time should never exceed 2 lots.

Some traders make the mistake of opening 2 lots per position when trading. Thus, when they have opened 5 positions, they end up with a total of 10 lots open. This is a mistake which would put their accounts at serious risk.

Remember that proper capital management is necessary if you want to stay alive in this very risky business that is forex. And appropriate discipline should always be observed by sticking to your trading plans and capital management guidelines. In the long run, these should prove to be profitable for your forex trading account.

This entry was posted on at and is filed under Forex Basics. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.