Risk Management for Funded Traders

Why Risk Management Matters More in Funded Trading

Risk management is important in all trading, but it takes on an entirely different dimension when you are trading a funded account. In personal trading, a bad week means you lose money. In funded trading, a bad week can mean you lose your entire account -- and the evaluation fee you paid to get it. The asymmetry of this risk is what makes risk management the single most important skill for funded traders.

Most prop firms set strict drawdown limits, typically 5% daily and 8-10% overall. This means you have very little room for error compared to retail trading. A trader who risks 3% per trade can hit the daily loss limit with just two consecutive losers. Understanding and respecting these limits is not optional -- it is the foundation of funded trading success.

Position Sizing Framework

Position sizing is the most concrete application of risk management. For funded accounts, we recommend the following framework based on account size and firm rules:

The 1% Rule for Funded Accounts

Risk no more than 1% of the account balance per trade. On a $100,000 account, this means your maximum loss per trade should be $1,000. This allows you to take 5 consecutive losses before hitting a typical 5% daily drawdown limit, giving you enough room to recover from a bad session.

Calculating Position Size

Position size = (Account Balance x Risk %) / (Entry Price - Stop Loss). For a $100,000 account risking 1% with a 50-pip stop loss on EUR/USD (where each pip = $10 per standard lot): Position size = ($100,000 x 0.01) / (50 x $10) = $1,000 / $500 = 2 standard lots.

Always calculate your position size before entering a trade. Never adjust your stop loss after entry to accommodate a larger position. The stop loss should be determined by the chart, and the position size should be determined by the stop loss.

Daily Loss Limit Strategy

Most firms have a 5% daily loss limit, which resets at the start of each trading day (midnight server time in most cases). Managing this limit requires discipline:

• Set a personal daily limit below the firm's limit. If the firm allows 5%, set your personal limit at 3%. This creates a buffer zone that prevents you from ever touching the firm's hard limit.
• Stop trading after 2-3 consecutive losses. This is a behavioral rule, not a mathematical one. After consecutive losses, your emotional state is compromised, and the probability of making a poor decision increases significantly.
• Track your daily P&L in real time. Know exactly where you stand relative to the daily limit at all times. Do not rely on the platform's balance alone -- calculate unrealized losses from open positions.

Drawdown Management

The overall drawdown limit (typically 8-12%) is the maximum you can lose from your starting balance before the account is terminated. Managing this requires a longer-term perspective:

Static vs. Trailing Drawdown: Understand which model your firm uses. With static drawdown, the limit is fixed from the starting balance. With trailing drawdown, the limit moves up as your account grows in profit. Trailing drawdown is more dangerous because profitable trades raise the bar, and a subsequent losing streak can terminate your account even though you are still in overall profit.

When in drawdown, reduce your position size. If you have lost 4% of the account, reduce your risk per trade from 1% to 0.5%. This gives you more trades to recover without hitting the overall limit. Think of it as a survival mode that preserves your account while you work through the losing period.

Risk Per Trade Guidelines

• Standard mode (0-2% drawdown): Risk 1% per trade, trade normally
• Caution mode (2-4% drawdown): Reduce to 0.75% risk per trade, be more selective with entries
• Survival mode (4%+ drawdown): Reduce to 0.5% risk per trade, only take A+ setups, consider taking a day off to reset mentally
• Profit mode (account up 5%+): Maintain 1% risk but you may take slightly more trades as you have buffer

Correlation Risk

A commonly overlooked risk factor is correlation between open positions. If you have three open trades on EUR/USD, GBP/USD, and AUD/USD, these are all correlated to USD strength. A sudden USD move could trigger stop losses on all three positions simultaneously, effectively tripling your risk exposure.

Treat correlated positions as a single risk unit. If you risk 1% per trade and have three correlated trades open, your effective risk is closer to 3%. Either reduce position sizes on correlated trades or limit the number of correlated positions you hold simultaneously.

Psychological Risk Management

The psychological pressure of funded trading is intense. You have paid money for the opportunity, you have rules you cannot break, and every loss brings you closer to account termination. This pressure leads to common psychological traps:

• Revenge trading: Taking impulsive trades after a loss to recover quickly. This almost always leads to bigger losses. The solution is to have a hard rule: stop trading after a set number of consecutive losses.
• Moving stop losses: Widening your stop to avoid taking a loss. This violates your position sizing and can lead to catastrophic losses. Never move a stop loss further from entry.
• Over-trading: Taking too many trades in a day to hit the profit target faster. Quality over quantity is the key to funded trading success.

Building Your Risk Management Plan

Create a written risk management plan before you start trading a funded account. Include these elements: maximum risk per trade, maximum daily loss (personal limit below firm's limit), maximum number of trades per day, rules for reducing risk in drawdown, and criteria for taking a day off. Review this plan daily before your trading session.

Risk management is not glamorous, but it is the single most important factor in funded trading success. The traders who survive and thrive with funded accounts are not necessarily the best at finding trades -- they are the best at managing risk. For more on the evaluation process itself, see our guide on how to pass prop firm evaluations.