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If there’s one constant in trading, it’s uncertainty. No matter how strong your analysis looks, every trade carries risk. That’s why risk management isn’t just a safety net – it’s the backbone of long-term success. Traders who survive and thrive in the markets don’t necessarily have the best systems, but they all respect risk. We’ve touched on risk management many times, but in this article, we’ll walk through some different techniques, outline their pros and cons, and explain who they be best suited for.

• Position Sizing
• Trailing Stop-Loss Orders
• Risk to Reward Ratios
• Hedging
• Diversification
• Mental Rules
• Putting It All Together
  
   

What it is: Deciding how large each trade should be as a percentage of your account balance. An example is using the “2% rule” – meaning you won’t risk more than 2% of their total capital on a single trade.

Example: With a $10,000 account, risking 2% means no more than $200 should be lost should you be stopped-out. If your stop-loss is 50 pips away, you’d size your trade so that each pip is worth $4.

Pros:

• Keeps losses consistent and controlled.
• Scales automatically as your account grows or shrinks.

Cons:

• May feel restrictive if you’re chasing large profits.
• Requires accurate calculation of stop-loss levels.

Best for: All traders. Whether a new or experienced trader, utilising risk management through position sizing is a valuable tool for being successful in the markets. 

What it is: Trailing your stop as the trade moves in your favour. In doing so, a stop-out would result in a much smaller loss that originally at risk.

Example: Buying EUR/USD at 1.1000 with a stop at 1.0950 caps your loss at 50 pips. As the trade moves in your favour, you may tighten your stop to 25 pips, meaning if you’re now stopped-out, your loss will be half the value than it was when you placed the trade.

Pros:

• Reduces your loss size, improving your overall risk to reward ratio.
• Allows you to have a reduced overall loss on consecutive losses.

Cons:

• Can get stopped out prematurely in volatile markets.
• Some traders trail their stop too soon and encounter a higher number of stop-outs as a result.

Best for: Anyone trading momentum. Trailing your stop can be used by both intraday and multi-day traders.

What it is: Measuring potential reward against potential risk before entering a trade. A common benchmark is 2:1 – for example; risking $100 and aiming for $200.

Example: If your stop-loss is 50 pips, look for a profit target of at least 100 pips to justify the trade.

Pros:

• Forces traders to focus on quality setups.
• Even with a 40% win rate, you can still be profitable because you can take on two losses for every winning trade (or more depending what your ratio is).

Cons:

• High ratios may never get reached if targets are unrealistic.
• Can cause traders to hold on to trades too long when the move is coming to an end. The result is watching your profits disappear.

Best for: Swing traders and position traders with patience to let trades play out.

What it is: Opening an offsetting position to reduce exposure. For example, buying EUR/USD and simultaneously selling GBP/USD to balance dollar risk.

Pros:

• Useful when you want to stay in a trade but protect against uncertainty (e.g., major news releases).
• Reduces large drawdowns in volatile markets.

Cons:

• Can get complicated and hard to manage, especially for beginner traders.
• Often reduces profit potential alongside risk.

Best for: Advanced traders who understand correlations and want to cushion exposure.

What it is: Spreading trades across different pairs or asset classes to reduce reliance on a single outcome.

Example: Instead of loading three positions on EUR/USD, split across EUR/USD, AUD/JPY, and Gold.

Pros:

• Protects you if one market suddenly turns against you.
• Smooths equity curve over time.

Cons:

• Dilutes returns if too many small trades are scattered.
• Doesn’t always protect you in global shocks when correlations rise.

Best for: Swing traders or investors with a large account who take multiple trades across currencies, commodities, and indices.

What it is: A set of rules, set by yourself, that you adhere to every week. For example, restricting yourself to three losses per week, or having a profit target of $1,000 per day.

Example: A scalper may set a mental rule of no more than three losses per day, meaning that if they encounter three losses, they stop trading for the day. Conversely, they may set a daily target of $1,000 and stop trading once that target is achieved.

Pros:

• Helps improve discipline in your trading.
• Reassures you that you have a sound plan in place.

Cons:

• Can cause you to miss trade opportunities.
• Can introduce emotion to your trading by trying to achieve the target.

Best for: Traders who generally struggle with the psychology of trading – especially overtrading.

Risk management isn’t about using every tool at once. It’s about finding the mix that matches your style, personality, and goals. For example, a scalper may choose to use tight stops with a consistent position size. Whereas a longer-term trader may prioritise reward-to-risk ratios and diversification.

There’s no right answer, but the most important thing is to be consistent with your risk management. Pick a framework, test it, and stick to it. Many traders blow up accounts not because their strategy was bad, but because they ignored risk rules in the heat of the moment.

In trading, you can’t control outcomes – but you can control risk. By using a combination of these techniques, you protect your capital, buy yourself time to improve your skills, and give yourself a real chance at long-term success.