Risk management for beginners: forget the 2% rule.

[AriaS]

Here is how the risk management works:

First of all you need to assess what maximal drawdown (in money! not in %) will make you emotionally comfortable, so that you don't start closing positions only because being scared. Obviously this decision will depend on your perception of yourself and all your capital. It's very personal. For example, someone who only has $100k of funds might feel that his max comfortable dd is 2k, while for someone else this would be 5k, and someone will panic if they see -$100.

For example, lest say that for you it's 1k.

Then you need to back test your strategy and see what volume you need to be trading so that the max dd doesn't exceed 1k.

Then you need to see the maximum margin you will be using (deposit load). This will depend on your strategy and the leverage of your account. Your backtest will show this for you. But make sure the backtester has the correct leverage in the inputs.

Then you can make an adequate deposit.

For example if your account's margin stop is 50% of the used margin and your deposit load will be 50% of the balance, then you can deposit 2k and feel safe, because your max dd will be 1k (50%), and the margin stop will get activated only if you reach dd of 1.5k (75%). You can deposit even more, but if you know that you will start closing your trades yourself anyway, when they reach dd of 1.1k or 1.2k so... It's all personal. After all, your goal is to be in control and feel comfortable. Otherwise mistakes and losses are inevitable.

Again: Deposit = 2k, max expected dd = 1k, max deposit load (used margin) = 1k, margin stop hits when equity is $500 (50% of the used margin).

Also you should make sure that your account's leverage is fixed. I saw a Swiss broker that changed it during nights or weekends. This can be a huge problem.

 

[AriaS]

Besides, the risk reward ratio = 1:2 rule is also a harmful myth. The only thing you should care about is recovery factor - rf, that you are able to reach in your back test. Rf = profit / max dd. The profit can be monthly or yearly. For example, if your max dd = 20% and yearly profit is 60%, then your rf = 3. It's considered amazing. As a beginner you'd probably think, "what?! It's not worth it". Ok, then work on making your reliable back test reach a better rf. But make sure your back test is reliable - only platforms with both bid and ask (like MT5). If it's scalping then only on real ticks. If it's swing then maybe OHLC testing can be enough, if you see that it's reasonably close to real ticks. But even if it's swing, but enters/gets out a lot during the news and in the direction of the price spike, then test only only on real ticks (because your the strategy depends more on real spread). Or alternatively, you can simply filter the news out, because you cannot test slippage or execution delays anyway. They can be a big problem. It depends on the broker

 

[RolloTape2025]

60% is an excellent return.

What do you not like about the risk reward ratio?

 

[AriaS]

60% is an excellent return.

What do you not like about the risk reward ratio?

Sure, 60% per year with 20% dd is a crazy return that 99% of traders never get. For some reason, beginners expect to make 10% per month at least. This makes more than 200% per year.

As for risk to reward ratio of every trade, it is absolutely irrelevant. What matters is the risk to reward ratio of a strategy as a whole. Those who believe the myth that "ideal risk to reward ratio of each trade must always be 1:2" will be losing money.

 

[Tytus_Barnowl]

3:1 Reward to risk. Don't exceed 2% of your account. If you "Blow up" your account then you have only yourself to blame and will be regarded as a penis sucker.

 

[AriaS]

3:1 Reward to risk. Don't exceed 2% of your account. If you "Blow up" your account then you have only yourself to blame and will be regarded as a penis sucker.

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