Risk per trade: the 1-2% rule
The idea is simple. If your account holds a certain amount, you risk only a small part of it on one trade. One to two per cent is the range most beginner material uses. The exact share is your decision, and it does not change the arithmetic.
The cost of a stop before the cost of a spread
Every trade has two costs. One is the spread, which you pay the moment you open. The other is the stop, which you pay only if the market moves against you. Beginners often count the spread and forget the stop, because the spread is small and visible. The stop is the larger number, and it is the one that decides whether the account lasts.
On EUR/USD around 1.0850, a spread of 0.0002 is two pips. If you trade a size where one pip is worth ₦800, that spread costs ₦1,600. Your stop might be twenty pips away, which is ₦16,000. The spread is ten per cent of the stop. That ratio matters, because a tight stop makes the spread a bigger share of your risk.
Your broker sets the spread and any commission, and these vary between brokers. Some brokers charge a commission on top of a raw spread. Others build the cost into a wider spread. You cannot compare two brokers by spread alone. You compare them by total cost per trade, which is spread plus commission plus any swap if you hold overnight.
Why the same naira risk gives different pip distances
The money you risk does not change with the instrument. The pip distance does. If you risk ₦16,000 and one pip is worth ₦800, your stop can be twenty pips away. If one pip is worth ₦1,600, your stop can only be ten pips away. Same risk, different distance, because the pip value changed with your size.
This is why you cannot copy a stop distance from someone else. A twenty-pip stop on EUR/USD is not a risk level. It is a distance. The risk is the distance multiplied by the pip value for your size. Two people can use the same twenty-pip stop and risk very different amounts.
The arithmetic runs in one direction. You start with the naira you will lose. You divide by the pip value to get the pip distance. Then you check whether that distance sits beyond the noise of the market. If it does not, the trade is too large for your account, not too small a stop.
What a losing run does to the next decision
A losing run changes the number you risk, because the number is a share of the balance. After losses, the balance is smaller, so the naira risk is smaller. That is the rule working as intended. It slows the drain without you deciding to slow it.
The danger is the opposite move. After a loss, some people raise the risk to win it back faster. That breaks the rule at the worst moment. The balance is already lower, so a raised share is a larger fraction of a smaller account. The next loss takes more than the last one did.
The rule does not predict wins. It only limits how much one trade can take. A run of ten losses at two per cent leaves most of the account. A run of ten losses at ten per cent leaves almost none. The market does not know your rule, but your balance does.
One account, two risk sizes, twenty trades
| Step | Amount | Note |
|---|---|---|
| Account balance | ₦1,600,000 | a starting figure used for this example only |
| Risk at 1 per cent | ₦16,000 | 1,600,000 x 0.01 |
| Risk at 12.5 per cent | ₦200,000 | 1,600,000 x 0.125, chosen to match the brief's $200 against $1,000 |
| Twenty trades at ₦16,000 lost each | ₦320,000 | 16,000 x 20 |
| Twenty trades at ₦200,000 lost each | ₦4,000,000 | 200,000 x 20, which is more than the account holds |
| Balance left after the first case | ₦1,280,000 | 1,600,000 minus 320,000 |
| Balance left after the second case | ₦0 | the account cannot lose more than it holds; it stops before twenty trades |
Your broker sets its own minimum trade size, spreads and any commission, and these vary between brokers. A real loss can also be larger than planned if a stop is filled at a worse price, or if the market gaps over the weekend.
Doing it once, step by step
You will set one naira figure before you look at any chart, then work out the size that makes your stop equal that figure. Do this once per trade, in the same order every time.
- 01
Write the money you will lose
Take your account balance and multiply by your chosen share. If the balance is ₦800,000 and you choose two per cent, the figure is ₦16,000. Write it down before you open the platform. This number is your risk for the trade.
- 02
Find the pip value for your size
Your platform shows the value of one pip for the size you are considering. On EUR/USD around 1.0850, a standard lot gives roughly ₦1,600 per pip at common exchange rates. A mini lot gives roughly ₦160. Check the figure your broker shows, because it varies.
- 03
Divide the risk by the pip value
₦16,000 divided by ₦1,600 is ten pips. That is the maximum stop distance for a standard lot. If the chart needs a wider stop, you must use a smaller size, not a larger risk. The division always gives you the distance that fits your money.
- 04
Check the stop against the chart
Place the stop where the trade idea is wrong, not where the money runs out. If that level is further than your calculated distance, reduce the size until the distance fits. If the size becomes too small to interest you, the honest answer is that the account is too small for that trade.
- 05
Add the spread to the cost
The spread is paid on entry and is separate from the stop. On a two-pip spread and a size worth ₦800 per pip, that is ₦1,600. Your total cost if the stop is hit is the stop loss plus the spread. Your broker sets both, and they vary between brokers.
- 06
Recalculate after every loss
After a loss, the balance is lower, so the naira risk is lower. Recalculate the figure from the new balance before the next trade. Do not raise the share to recover faster. The rule is a share of what is there now, not what was there before.
The mistake most people make here
The common mistake is to pick the lot size first, because a bigger size looks like a bigger opportunity, and only afterwards ask what a stop would cost. That order hides the risk. Instead, write down the money you are willing to lose, then work out the position size that makes your stop equal to that amount. If the size that fits your risk looks too small to be interesting, the honest answer is that the account is too small for that trade, not that the risk should be raised.Check yourself
An account holds ₦800,000 and the reader risks 2 per cent on one trade. How much is that in naira?
800,000 x 0.02 = ₦16,000.
The same reader takes ten trades and loses the planned amount on each. How much is gone?
16,000 x 10 = ₦160,000, leaving ₦640,000.
If the reader instead risked ₦80,000 per trade, how many such losses would empty the account?
800,000 divided by 80,000 = 10 trades. The account would be gone after ten losses, before any recovery.
Questions that come up next
How much is one pip worth in naira on EUR/USD?
It depends on your trade size, not on the price of EUR/USD. A standard lot moves about ₦1,600 for each pip when the exchange rate is around 1,085 naira to the dollar. A mini lot moves about ₦160 per pip. A micro lot moves about ₦16 per pip. Your broker's contract sizes and conversion rate set the exact figure, and these vary between brokers.
What happens if my stop is filled at a worse price than I set?
Your loss will be larger than the amount you planned to risk. This is called slippage. It happens when the market moves fast, or when it gaps over the weekend. The stop becomes a market order once triggered, so it fills at the next available price. You cannot set a stop and assume the final loss will match your number exactly.
Can I risk 1 per cent on one trade and still make a profit over a month?
That depends on how often your trades win and how much they win compared with what they lose. The 1 per cent rule does not promise a profit. It only limits how much one trade can take from the account. A run of losses at 1 per cent still reduces the balance. The rule controls the size of the damage, not whether damage happens.
Should I use 1 per cent or 2 per cent?
The choice is yours, and it does not change the arithmetic. One per cent means ten losses in a row cost about 10 per cent of the account. Two per cent means ten losses cost about 20 per cent. A smaller share leaves more room for a losing run. A larger share recovers faster when trades win. Neither is right for everyone.
How do I work out my position size from the naira risk?
Start with the naira amount you are willing to lose. Divide it by the pip value for the size you are considering. That gives the pip distance your stop can sit at. If that distance is too tight for the market's normal movement, the size is too large for your account. Reduce the size until the stop distance is realistic.
Does the 1-2 per cent rule apply to every trade I take?
It applies to each trade you open, not to the total you have open at once. If you hold three trades at the same time, your total risk is the sum of the three. Some traders keep the total across all open trades within the same 1-2 per cent. Others allow more. The choice is yours, but the sum is what the account actually carries.
The words used on this page
- Pip
- The smallest common price move in a currency pair. On EUR/USD, one pip is 0.0001. The naira value of one pip depends on your trade size and the exchange rate.
- Spread
- The gap between the price at which you can buy and the price at which you can sell. You pay it the moment you open a trade. It is a cost, not a risk, because it does not change with the market's direction.
- Stop
- An order that closes your trade at a chosen price to limit a loss. It becomes a market order when triggered. A fast market or a weekend gap can fill it at a worse price than you set.
- Lot
- A standard unit of trade size. A standard lot on EUR/USD moves about ₦1,600 per pip at an exchange rate near 1,085 naira to the dollar. Smaller lots move proportionally less.
- Balance
- The money in your trading account right now, including profits and losses from closed trades. Your risk per trade is a share of this balance. After a loss, the balance is smaller, so the naira risk is smaller too.
- Slippage
- The difference between the price you expected on a stop and the price you actually got. It makes a real loss larger than the amount you planned to risk. It is common around news events and market opens.
What to take away
- Decide the naira amount you can lose on one trade before you look at lot size, stop distance or target.
- The naira risk stays fixed as a share of your balance, so after losses the amount you risk falls automatically.
- A stop distance is not a risk level. The risk is that distance multiplied by the pip value for your size.
- Your broker sets minimum trade sizes, spreads and commissions, and these vary between brokers.