Stage 3: Execution and Risk · Module 8: Risk Management and Position Sizing · Lesson 1 of 9 · Back to course
Most beginners spend their time looking for a better entry: a new indicator, a new pattern, a new strategy video. Very few spend the same time on the question that decides whether they’re still trading in six months: how much do I lose when I’m wrong?
This module is about that question. It’s the least exciting part of the course and the most important. This first lesson shows you why, using simple maths rather than opinions.
What you’ll learn
- Why every strategy has losing streaks, even good ones
- What a losing streak does to an account at different risk sizes
- Why losses hurt more than equal gains help
- The difference between a bad trade and a bad process
- What the rest of Module 8 covers
Every strategy loses, often several times in a row
No method wins every trade. Even a strategy with a genuine edge might win only 40–55% of the time. And losses don’t arrive neatly spaced out. They come in clusters, purely by chance.
Here’s our own calculation of how likely you are to see a losing streak of a given length somewhere in 100 trades, assuming each trade is independent and the win rate stays fixed:
| Win rate | 5+ losses in a row | 6+ in a row | 8+ in a row | 10+ in a row |
|---|---|---|---|---|
| 50% | about 81% | about 55% | about 17% | about 4% |
| 40% | about 98% | about 87% | about 49% | about 20% |
Our own calculation. Real trading results aren’t perfectly independent, so treat these as a rough guide, not a forecast.
So if you win 40% of the time, it’s close to certain you’ll hit five losses in a row within 100 trades, and roughly a coin-flip that you’ll hit eight. That’s not a sign the strategy is broken. It’s just what randomness looks like.
The question is what that streak does to your account.
What a losing streak does at different risk sizes
Say you have a £5,000 account and you risk a fixed percentage of your current balance on every trade. Here’s what ten losses in a row would do:
| Risk per trade | Balance after 10 losses | Total drop |
|---|---|---|
| 1% | about £4,522 | about 9.6% |
| 2% | about £4,085 | about 18.3% |
| 5% | about £2,994 | about 40.1% |
| 10% | about £1,743 | about 65.1% |
At 1%, ten losses is a bad month. You’re annoyed, but your account and your confidence are intact, and you can review what happened calmly.
At 10%, the same ten losses – which, remember, might happen with a perfectly decent strategy – has taken two thirds of your money. The strategy didn’t change. Only the size did.
That’s the core idea of this module: your strategy decides whether you can make money over time. Your risk management decides whether you survive long enough to find out.
Losses are harder to climb out of than they look
There’s a second problem. Losses and gains aren’t symmetrical. If you lose 10%, you need an 11.1% gain to get back to where you started. If you lose 50%, you need a 100% gain.
| Loss | Gain needed to get back to the start |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 50% | 100% |
So big losses don’t just cost you money – they make the climb back much steeper. We go through this properly in Lesson 8.7, drawdown maths.
A bad trade isn’t the same as a bad process
A useful habit is to separate two questions after every trade:
- Did I follow my plan? Right setup, right size, stop where it should be.
- What was the result? Win or loss.
A trade that followed your plan and lost is a good trade with a bad outcome. That’s normal. A trade that broke your rules and won is a bad trade with a lucky outcome – and it’s more dangerous, because it teaches you the wrong lesson.
Risk management is what lets you judge your process over dozens of trades rather than panicking over one. If no single trade can do serious damage, you can afford to be patient.
Why beginners skip this
It’s worth being honest about why so many people ignore risk management:
- Small risk feels slow. Risking 1% of £2,000 is £20 a trade. That can feel pointless when you see others posting big wins. But those posts rarely show the losses that came before or after.
- Leverage makes big positions easy. UK rules cap retail leverage (see UK leverage limits), but even 30:1 lets you open a position that can wipe out a small account in one move. Maximum leverage is a limit, not a target.
- Confidence after a few wins. A winning run makes people size up – often just before the losing run arrives.
- Not knowing how. Working out a stake from a stop distance takes a minute once you’ve learned it. Lessons 8.3 and 8.4 show you how.
The four questions risk management answers
By the end of this module you’ll be able to answer these four questions before any trade:
- How much of my account will I risk? (8.2 The 1% rule)
- What size does that mean for this trade? (8.3 Position sizing and 8.4 Pip, point and tick values)
- Is this trade worth taking? (8.5 Risk-to-reward and R and 8.6 Expectancy)
- When do I stop for the day, the week or altogether? (8.7 Drawdown maths, 8.8 Correlation and 8.9 Loss limits)
If you’re planning a prop firm challenge one day, this module matters even more. Challenges have strict daily and overall loss limits, and most people who fail do so by breaking a loss rule, not by missing a profit target. The prop challenge prep stage builds directly on what you learn here.
Key takeaways
- Every strategy has losing streaks. With a 40% win rate, five losses in a row within 100 trades is close to certain.
- The same streak can cost under 10% or over 60% of an account – the only difference is size.
- Losses need bigger gains to recover: a 50% loss needs a 100% gain.
- Judge your process over many trades, not each result. Small risk per trade makes that possible.
- Risk management doesn’t create an edge. It gives an edge, if you have one, time to show itself.
Quick check
- You risk 2% per trade and have ten losses in a row. Roughly how much is your account down?
- What gain do you need to recover from a 20% loss?
- You broke your rules on a trade and it won. Was it a good trade?
Answers: 1) About 18%. 2) 25%. 3) No – it was a bad trade with a lucky outcome.
FAQs
Can a good strategy make up for poor risk management? Not reliably. A strategy with an edge can still have a long losing streak, and if your size is too big, that streak can end your account before the edge shows up.
Isn’t risking more the only way to grow a small account? Risking more speeds up gains and losses. With a small account it’s usually better to treat the early months as learning, keep risk small, and add savings rather than chase returns.
Does a stop-loss mean my risk is limited? A stop-loss helps, but in fast markets or over a weekend gap the price can jump past it, so you can lose more than planned. A guaranteed stop removes that risk for a fee.
Previous: ← 7.6 Weekend gaps, news spikes and overnight financing (coming soon)
Disclaimer: This page is general education, not financial or investment advice or a personal recommendation, and it doesn’t take your circumstances into account. Examples are hypothetical, for illustration only, and not an invitation to buy or sell. Learning a strategy doesn’t guarantee profits. Past performance is not a reliable guide to future results. Futures, spread bets and CFDs are complex and carry a high risk of losing money quickly because of leverage, and most retail traders lose money. With a real futures account, losses can exceed your deposit. Only trade with money you can afford to lose, and speak to an independent FCA-authorised adviser if you’re unsure. Read our full risk warning.