No entry rule, indicator or model matters as much as how much is risked on each trade. Risk management decides whether a run of losses is an inconvenience or the end of an account.
Leverage and margin
Forex is usually traded with leverage: a small deposit controls a much larger position. Leverage magnifies gains and losses equally. Regulators in many countries cap retail leverage for exactly this reason, and brokers can close positions automatically when margin runs out (a stop-out).
Position sizing
A common approach is to risk a small, fixed fraction of the account on each trade, sized by the distance to the stop-loss:
Because the risk is a fraction of current equity, positions shrink automatically during a drawdown. Systems that increase size after losses (martingale) do the opposite.
Drawdown arithmetic
| Loss from peak | Gain needed to get back |
|---|---|
| 10% | 11.1% |
| 25% | 33.3% |
| 50% | 100% |
| 75% | 300% |
The deeper the drawdown, the harder the recovery. This is pure arithmetic, not a forecast.
Risk controls for automated trading
- A hard stop-loss on every position, set at order entry.
- Maximum number of open positions and maximum total exposure per currency.
- A daily or weekly loss limit that switches the EA off.
- Spread and slippage filters, especially around major news releases.
- Regular manual review of open trades, logs and terminal connectivity.
- Never trading money you cannot afford to lose.