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Lesson 17 of 18 · 4 min read

Managing risk

Position size, stop-loss, the reward-to-risk ratio and why leverage is the fastest way to lose everything.

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In this lesson

  • work out how big a trade you can afford
  • learn to set a stop-loss before you buy
  • understand why leverage is dangerous for beginners

Successful traders are not the ones who always get the direction right. They are the ones who survive their mistakes. Even if you are often wrong, small losses will not ruin you – and that is the first condition for being able to keep learning. All of risk management revolves around one question: how much do I lose if I am wrong?

The 1% rule#

Risk only a small part of your money on one trade – 1–2% is often quoted. With an account of 1,000 euros and 1% risk, that is 10 euros. Ten losing trades in a row will then not ruin you – you lose about a tenth, not everything.

Stop-loss: decide before you buy#

A stop-loss is an order that automatically sells your position when the price falls to a level you chose in advance. You set it before buying, with a clear head – not while the price is falling and you hope it will "bounce back".

STOP-LOSS−100 %It'll bounce back!
A stop-loss is a parachute: you open it before the ground gets close.

The stop-loss goes where your assumption would turn out wrong – typically just below support.

An example on a real chart#

In early May 2024, Bitcoin touched support around 56,500. Imagine buying at 58,400, with a stop-loss below support at 55,500 and a profit target (take-profit) at 67,000:

An example trade – an explanation, not a recommendation. The price hit the profit target on 17 May, not the stop-loss.
  • Entry: 58,400
  • Stop-loss: 55,500
  • Take-profit: 67,000
  • Buy: May 1, 2024
  • Take-profit: May 17, 2024
BTC/USDT · 1D · Data: Binance Vision · CC BY-NC-SA 4.0

How much to buy? The stop-loss is 5% below the purchase price (58,400 → 55,500). You want to risk 10 euros, so position size = 10 euros ÷ 5% = 200 euros. If the price falls to the stop-loss, you lose roughly 10 euros (more in a fast market).

Reward-to-risk ratio: you risk 2,900 USDT per bitcoin (58,400 → 55,500), and the target is 8,600 USDT above the purchase. That is about 1 : 3 – the possible profit is about three times the risk. On paper, that could cover the losses even if only one trade in three works out; in reality, fees, slippage and the trades that hit the stop-loss eat into it. This example happened to work – many similar ones did not.

Leverage: a fast road to zero#

Trading with leverage means trading with borrowed money. With 10× leverage, a 10% price move against you wipes out your whole deposit. According to analyses ESMA cited in 2018, 74–89% of retail investor accounts lose money trading leveraged CFDs. That is why EU rules limit leverage on crypto CFDs for retail investors to 2 : 1.

A beginner does not need leverage

Leverage magnifies both profits and losses – and losses come faster than you can react. Until you have long experience with small amounts and no leverage, leave it alone.

Common myths#

  • "I'll set a stop-loss when I need one." When you need one, emotions will decide.
  • "I'll move the stop-loss lower, it'll come back." That is how big losses happen.
  • "A bigger position = a bigger profit." And a bigger loss. Position size is driven by risk, not greed.

Summary

  • Risk only 1–2% of your account on one trade.
  • Set the stop-loss before buying, where your assumption would turn out wrong.
  • Position size = the amount you want to risk ÷ the distance to the stop-loss.
  • Look for trades where the possible profit is bigger than the risk; as a beginner, avoid leverage.