Milton Markets
Back to Calculators
PIP VAL
Beginner
10 min read
Milton Markets Trading Team
Updated Dec 2024

Risk Management 101: Protecting Your Trading Capital

Master the essential risk management principles that separate profitable traders from those who blow their accounts. Learn portfolio-level risk control, drawdown management, and the psychology of risk.

PIP VAL

Real Trader Story: The 9% Disaster

"I once ignored my own 2% rule for a 'can't lose' news trade on NFP day... lost 9% in two hours. That single slip set me back months. Stick to your rules—even if you're sure."

- Senior trader at Milton Markets

"Rule No.1: Never lose money. Rule No.2: Never forget rule No.1."— Warren Buffett

This isn't just for stocks — in forex, risk is amplified, and even a small mistake can wipe out months of gains. That's why pros care more about preservation than big wins.

PIP VALMyths vs Reality

❌ Myth: You need to risk more to win big
✅ Reality: Most pros risk small and scale up with profits. Survivability > one big win.
❌ Myth: Stop losses are for weak traders
✅ Reality: Every institutional trader uses stops. It's insurance, not weakness.
❌ Myth: Diversification doesn't matter in forex
✅ Reality: Correlated pairs can amplify losses. EUR/USD + GBP/USD = double EUR exposure.

The 5 Pillars of Risk Management

PIP VAL

1. Position Size Control

Never risk more than 1-2% of your account on a single trade. This isn't being conservative—it's being professional.

Quick Case Study:

Trader A risked 5% per trade and hit a 6-trade losing streak (not uncommon). Total drawdown: -26%

Trader B used 1% risk: Drawdown was only -6%

Pro Tip:

Use our Position Size Calculator to never guess your trade size again.

PIP VAL

2. Stop Loss Discipline

Set your stop before you enter. Move it only in your favor, never against you.

Warning:

"Just one more candle" thinking has destroyed more accounts than any strategy ever could.

Prevents:

  • • Emotional decision-making under pressure
  • • Small losses becoming account killers
  • • The "hope and pray" trading mentality
PIP VAL

3. Portfolio Heat Management

Limit total portfolio risk to 6-10% across all open positions. Correlation kills.

Hidden Danger:

EUR/USD + GBP/USD + AUD/USD = 3 trades, but really just betting on USD direction 3 times.

Builds:

  • • True diversification across currency blocs
  • • Protection against black swan events
  • • Steady, consistent growth patterns
PIP VAL

4. Drawdown Recovery Plan

Know the math: a 50% loss requires a 100% gain to recover. Plan for drawdowns before they happen.

Recovery Math (Starting with $10,000):

10% loss → $9,000Needs 11% gain to recover
25% loss → $7,500Needs 33% gain to recover
50% loss → $5,000Needs 100% gain to recover

Action Plan:

  • • At -5% drawdown: Review recent trades
  • • At -10% drawdown: Reduce position sizes by 50%
  • • At -15% drawdown: Stop trading, reassess strategy
PIP VAL

5. Emotional Risk Control

Your biggest risk isn't the market—it's you. Revenge trading and FOMO kill more accounts than bad strategies.

Spot the Urge:

  • • "I need to make back that loss right now"
  • • "This setup is too good to miss" (after 3 losses)
  • • "I'll just double the size this once"

Pro Tip:

Have a non-trading friend review your risk plan. If it sounds crazy to them, it probably is.

The 7 Account Killers (And How to Avoid Them)

💀 Killer #1: Overleveraging

"I can handle 10% risk per trade"

Reality: 3 consecutive losses = -27% drawdown. Game over.

💀 Killer #2: No Stop Losses

"The market will come back"

Reality: CHF flash crash, Brexit vote, COVID crash. Markets don't always come back.

💀 Killer #3: Revenge Trading

"I'll win it back on the next trade"

Reality: Emotional decisions compound losses. Take a break instead.

💀 Killer #4: Correlation Blindness

"I'm diversified across 5 pairs"

Reality: All EUR pairs move together. You're not diversified, you're concentrated.

💀 Killer #5: News Gambling

"NFP will definitely beat expectations"

Reality: News is 50/50. The reaction is unpredictable. Stay out or use tiny size.

💀 Killer #6: Weekend Risk

"I'll just hold through the weekend"

Reality: Sunday gaps can blow stops. Close before Friday close or use tiny size.

💀 Killer #7: Margin Call Ignorance

"I'll never hit my margin limit"

Reality: Volatile markets eat margin fast. Know your limits with our Margin Calculator.

Portfolio Examples: Safe vs. Dangerous

✅ Safe Portfolio ($10,000 account)

EUR/USD Long1% risk ($100)
USD/JPY Short1% risk ($100)
AUD/NZD Long1% risk ($100)
Total Portfolio Risk3% ($300)

Why it works: Different currency blocs, manageable risk, room for error.

PIP VAL❌ Dangerous Portfolio ($10,000 account)

EUR/USD Long3% risk ($300)
GBP/USD Long3% risk ($300)
EUR/GBP Long3% risk ($300)
Total Portfolio Risk9% ($900)

Why it's dangerous: All EUR correlated, high individual risk, one bad day = account damage.

Your Risk Management Action Plan

Weekly Risk Review Checklist

PIP VALQuick Risk Calculator

Calculate your maximum position size based on your risk tolerance:

Use our position size calculator to never guess your trade size again

PIP VALOpen Position Size Calculator

Get Professional Review

Want a pro to review your risk management plan? Our trading specialists can help you fine-tune your approach.

Previous
Position Sizing Mastery
Next
Pip Value Basics

Quick Navigation

OverviewKey ConceptsPractical ExamplesCommon MistakesNext Steps

Save for Later

Download this guide as PDF for offline review and reference.

Related Guides

beginner
Position Sizing Mastery
beginner
Margin Requirements