Managing risk with multiple trades is essential for protecting your capital and ensuring long-term trading success. When trading multiple positions simultaneously, it’s important to maintain a balance between potential profits and losses while avoiding overexposure to any single asset, market, or strategy. Here’s how to effectively manage risk when trading multiple trades.

1. Set an Overall Risk Limit

Determine how much of your total account balance you’re willing to risk across all open trades at any given time. This is known as your aggregate risk limit.

• A common rule is to risk no more than 2-5% of your account balance across all trades.
• For example, if your account balance is £10,000 and you set a 5% aggregate risk limit, the maximum risk across all trades would be £500.

2. Allocate Risk Per Trade

Divide your overall risk limit among the trades you plan to take. For example, if you decide to risk 3% of your account balance on three trades, you can allocate 1% risk per trade. This ensures that no single trade has the potential to cause significant damage to your account.

Example:

• Account balance: £10,000
• Risk per trade: 1%
• Maximum risk per trade: £10,000 × 0.01 = £100
• If you open three trades, the total risk is £100 × 3 = £300, which is within the 3% limit.

3. Diversify Across Assets and Markets

Diversification helps reduce the impact of losses from any single trade or market by spreading risk across multiple assets or currency pairs.

• Trade Different Assets: For example, include forex, commodities, and indices in your portfolio.
• Avoid Correlated Trades: Trading highly correlated assets (e.g., EUR/USD and GBP/USD) increases exposure to the same market risks. Instead, diversify across uncorrelated pairs (e.g., EUR/USD and AUD/JPY).

4. Use Proper Position Sizing

Calculate the position size for each trade based on your risk tolerance and the stop-loss level. Use the formula:

Position Size = (Risk Per Trade ÷ Stop-Loss Distance) ÷ Pip Value

Example:

• Risk per trade: £100
• Stop-loss distance: 50 pips
• Pip value: £1 (for a mini lot)
• Position size = (£100 ÷ 50) ÷ £1 = 2 mini lots (20,000 units).

This ensures that each trade aligns with your risk parameters.

5. Monitor Correlation Between Trades

Highly correlated trades move in the same direction, increasing overall risk. For example, EUR/USD and GBP/USD are positively correlated, meaning losses in one trade may lead to losses in the other.

• Use tools like a correlation matrix to identify and limit exposure to correlated trades.
• Diversify into negatively correlated or uncorrelated assets to balance your portfolio.

6. Set Stop-Loss Orders for Each Trade

Always use stop-loss orders to cap potential losses on each trade. This ensures that even if multiple trades move against you, your losses are limited to your predefined risk per trade.

• Place stop-loss levels based on technical analysis, such as support and resistance levels or volatility indicators like the Average True Range (ATR).
• Avoid moving stop-loss levels further from the entry point to reduce losses artificially.

7. Monitor Your Margin Usage

Trading multiple positions can quickly consume your margin, increasing the risk of a margin call. To manage this:

• Use leverage conservatively, especially when trading multiple trades.
• Monitor your margin level to ensure it stays above the broker’s requirements.
• Avoid overleveraging, as it amplifies losses when trades move against you.

8. Use Risk-Reward Ratios for Each Trade

Set a minimum risk-reward ratio for every trade to ensure that potential gains outweigh potential losses. A common ratio is 1:2, meaning you risk £1 to potentially earn £2.

Example:

• Stop-loss: 50 pips
• Take-profit: 100 pips
• Risk-reward ratio: 1:2

Maintaining favourable risk-reward ratios across all trades helps offset losses with fewer winning trades.

9. Track Aggregate Exposure

Monitor your total exposure across all trades to ensure it aligns with your risk tolerance. For example:

• Currency Exposure: If you’re trading multiple currency pairs, check how much of your portfolio is exposed to a single currency.
• Sector Exposure: If trading stocks, ensure you’re not overly invested in one sector.

10. Review and Adjust Trades Regularly

Keep an eye on your open positions and adjust as needed to maintain balance and manage risk.

• Reduce Exposure: If a trade becomes too large relative to your account, consider scaling down the position.
• Lock in Profits: Use trailing stop-loss orders to protect gains while allowing trades to run.
• Close Underperforming Trades: If a trade consistently fails to meet expectations, consider closing it early to free up margin for better opportunities.

FAQs

Why is managing risk important for multiple trades?

Managing risk ensures you don’t overexpose your account to potential losses, preserving your capital and enabling long-term success.

What is an aggregate risk limit?

An aggregate risk limit is the total amount of capital you’re willing to risk across all open trades at any given time, typically 2-5% of your account balance.

How do I calculate position size for multiple trades?

Calculate position size for each trade using the formula: Position Size = (Risk Per Trade ÷ Stop-Loss Distance) ÷ Pip Value.

What is the role of diversification in managing risk?

Diversification spreads risk across multiple assets or markets, reducing the impact of losses from any single trade.

How can I avoid correlated trades?

Use a correlation matrix to identify and limit exposure to trades that move in the same direction, such as EUR/USD and GBP/USD.

What is the benefit of setting stop-loss orders for each trade?

Stop-loss orders cap potential losses, ensuring that no single trade exceeds your predefined risk.

How does leverage affect risk management?

Excessive leverage amplifies losses, especially when trading multiple positions. Use leverage conservatively to protect your capital.

What risk-reward ratio should I use for multiple trades?

Aim for a minimum risk-reward ratio of 1:2 for each trade to ensure potential gains outweigh potential losses.

How can I monitor total exposure across trades?

Track exposure to individual currencies, sectors, or assets to ensure your portfolio remains balanced and diversified.

Should I close underperforming trades early?

Yes, closing underperforming trades can free up margin and reduce risk, allowing you to focus on better opportunities.

Conclusion

Managing risk with multiple trades requires a disciplined approach to setting risk limits, diversifying positions, and monitoring overall exposure. By allocating risk per trade, using proper position sizing, and setting stop-loss orders, you can protect your capital and avoid overexposure. Regularly review your trades, monitor correlations, and maintain a balanced portfolio to ensure long-term trading success.