A risk plan describes how much a trade could lose, what would invalidate the idea and when you will stop trading. It cannot make a losing strategy profitable, but it can make your exposure easier to understand.
Educational examples only: the figures below are hypothetical, not a suggested risk level or a trade recommendation. Losses can exceed a planned amount because of gaps, slippage, fees or failed execution.
Position size starts with the loss budget
Write down your account equity, a hypothetical risk percentage, the distance between entry and stop, and the value of a pip for the position. Do not calculate size from available margin alone.
Risk budget = account equity × risk percentage.
Position size in lots = risk budget ÷ (stop distance in pips × pip value per lot).
The units and account currency must match. If the quote currency differs from your account currency, convert the pip value using the relevant exchange rate. Check the broker’s contract size and minimum size increment.
Worked EUR/USD example
Assume a USD account with $2,000 equity, an illustrative 0.5% risk budget and a stop 25 pips from entry. The budget is $10. For EUR/USD, a standard 100,000-unit lot has a pip value of $10 when a pip is 0.0001 USD per euro.
The calculation is $10 ÷ (25 × $10) = 0.04 lots, or 4,000 euros of base-currency exposure. A 25-pip adverse move would therefore represent about $10 before costs. Commissions, spread treatment and slippage can increase the loss; allow for them and round down to an available size where appropriate.
Margin and risk are different
Margin is collateral for a leveraged position. It is not a cap on the position’s possible loss. At 30:1 leverage, a hypothetical $10,000 exposure needs approximately $333.33 of initial margin. A 1% adverse move on that exposure is about $100 before costs, regardless of that initial margin amount.
A stop order has limits
A normal stop becomes executable when its trigger conditions are met. In fast markets, the fill can be worse than the chosen level. Guaranteed stops, where offered, have separate fees and conditions. Read the execution policy and understand the difference between a stop and a stop-limit order; limiting price can leave an order unfilled.
Check total exposure
Several positions can express the same market view. For example, buying EUR/USD and GBP/USD creates exposure to a weaker US dollar in both trades. Historical correlations change, so a correlation reading is context rather than a hedge guarantee.
Set written limits
- Define a maximum planned loss for each trade and for the session.
- Record how many simultaneous positions you permit.
- Decide how you will handle important releases, spreads widening and platform outages.
- Avoid increasing size simply to recover a previous loss.
- Review actual fills and costs against the assumptions in your plan.
Drawdown changes the recovery maths
After a 20% loss, an account needs a 25% gain to return to its starting value: $1,000 falls to $800, then needs $200 ÷ $800. After a 50% loss, the required gain is 100%. These calculations show why controlling exposure matters; they do not suggest that recovery is assured.
Before you place a practice trade
Can you explain the instrument, size, margin, stop behaviour, total costs and combined exposure? If one is unclear, pause and check the product specification. A demo is useful for learning calculations and order controls, but live execution may differ.
Read our risk warning and guide to trading tools. For external context, see the CFTC forex advisory.