Risk Management for Forex Trading
The most important skill in forex trading isn't finding good setups—it's protecting your capital. Learn the risk management rules used by institutional traders and prop firms.
🛡️ What Is Risk Management?
Risk management is the practice of limiting losses so no single trade or series of trades can destroy your account. The golden rule:
Never risk more than 1-2% of your capital per trade
This means if you have R10,000, you risk only R100-R200 per trade. With this rule, you can survive 50-100 consecutive losses before going broke—giving your edge time to play out.
The 3 Pillars of Risk Management
Position Sizing
How much to risk per trade based on your account size and stop loss distance.
Position Size Formula:
Example: R10,000 account, 2% risk (R200), 50-pip stop, R10/pip = 0.4 lots
💡 Pro Tip: Use our Lot Size Calculator to calculate position sizes instantly.
Stop Loss Placement
Where to exit a losing trade. Your stop loss should be:
- ✓Beyond invalidation point: Past the level that proves your setup wrong
- ✓Not too tight: Give the trade room to breathe (avoid whipsaws)
- ✓Not too wide: Wider stops = smaller position size to maintain risk %
⚠️ Never move your stop loss further away. If you set it at 50 pips, don't change it to 100 pips because the trade is losing. Take the loss and move on.
Risk-Reward Ratio
The relationship between potential profit and potential loss.
If you risk 50 pips to make 100 pips, your risk-reward ratio is 1:2.
| Win Rate | Min R:R Needed | Breakeven? |
|---|---|---|
| 40% | 1:2 | ✓ Profitable |
| 50% | 1:1 | ✓ Breakeven |
| 60% | 1:1.5 | ✓ Profitable |
AI PIPS targets 1:2 to 1:4 risk-reward ratios, meaning we aim to make 2-4 times what we risk on each trade.
Advanced Risk Management Rules
Max Daily Risk: 6%
If you hit 3 losses in a day (3 × 2% = 6%), stop trading for the day. Prevents revenge trading.
Max Concurrent Trades: 3-5
Don't open 10 trades at once. If they're correlated (e.g., all USD pairs), one news event wipes you out.
Scale Out at Targets
Close 50% at TP1, 30% at TP2, let 20% run to TP3. Secures gains while capturing big moves.
Trailing Stops After TP1
Once trade hits TP1, move stop to breakeven. You can't lose anymore—only win less or win more.
What FTMO Teaches About Risk
FTMO is a prop firm that funds profitable traders. Their evaluation rules mirror institutional risk management:
- •Max daily loss: 5% of account
- •Max total drawdown: 10% of account
- •Profit target: 10% in 30 days (achievable with 2% risk/trade, 1:2 R:R)
These rules force you to trade defensively. That's why AI PIPS founder Nightmare is FTMO-funded—he proved he can grow capital without blowing up accounts.
Trade with Proper Risk Management
Every AI PIPS signal includes stop loss, take profit levels, and risk guidance. Trade with confidence knowing your capital is protected.
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Nightmare
Founder & Lead Trader
11+ years experience • FTMO Funded Trader