1. Trader Breaches the Rule (Risk exceeds 3%):
- Initial Account Balance: $100,000
- Maximum Risk per Position: 0.03 × $100,000 = $3,000
- Trader’s Unrealized/Realized Loss: $5,000
In this case, the trader’s unrealized or realized loss on the position is $5,000, which exceeds the maximum allowable risk of $3,000 (3% of the initial balance). Since the trader has lost more than 3% of the account balance, this is a breach of the rule. If the trader is scalping and opening multiple trades in the same pair within an hour, these trades could be grouped into one net position. If the total loss of all trades combined exceeds 3%, then it violates the rule.
2. Trader Does Not Breach the Rule (Risk is within the limit):
- Initial Account Balance: $100,000
- Maximum Risk per Position: 0.03 × $100,000 = $3,000
- Trader’s Unrealized/Realized Loss: $2,500
In this case, the trader’s unrealized or realized loss is $2,500, which is within the maximum allowable risk of $3,000. Therefore, the trader has not breached the rule and is within the risk limits.
Note: The trader can use more than 3% of their capital in a single position as long as the risk (realized or unrealized loss) does not exceed 3% of the account balance.