Last Updated:XX XX, 2025
“What is a lot? What’s the difference between 0.01 and 1.0?”
If you start trading without understanding this difference, it can wipe out your account in just one trade.
At prop firms, trading with full leverage directly leads to instant disqualification. However, with proper money management, it’s possible to design a system where 50 consecutive losses would leave 36% of the account remaining.
In this article, we will provide a complete explanation of the “2% Rule” and “Lot Calculation”, which are the most important aspects of money management at prop firms. We have summarized the golden ratio practiced by professional traders into a formula that can be calculated with just a calculator.
From Vol.8 onwards, we enter the “Practical Optimization Phase”. This is where the real challenge begins. Let’s learn the practical techniques together to achieve passing grades!
- The true meaning and calculation method of the 2% Rule
- The formula for lot calculation using just a calculator
- The value of 1 pip for different currency pairs
- Why full leverage is instantly fatal (proven with numbers)
- Risk adjustment methods for prop firms (1-1.5% Rule)
- Position sizing techniques for a losing streak
▶ 【Learn with Video】Prop Firm Textbook Vol.8
“Golden Ratio of Money Management | 2% Rule and Lot Calculation”
【FX Basics】What is a Lot? Understanding the Fundamentals of Trading Units
First, let’s learn about the basic “lot” before diving into money management.
Teacher, what is a lot exactly? What’s the difference between 0.01 and 1.0?
Great question. A lot is the trading unit in FX. The difference in lot size can result in a 100-fold change in profit and loss with the same price movement.
What is a Lot (Lot)? The Trading Unit in FX
In FX, when buying and selling currencies, the trading volume is specified in “lots”. A standard FX account is set up as follows:
| Lot Size | Trading Volume (Currency) | For USD/JPY (1 USD = 150 JPY) |
|---|---|---|
| 1.0 Lot | 100,000 currencies | Approx. 15 million JPY |
| 0.1 Lot | 10,000 currencies | Approx. 1.5 million JPY |
| 0.01 Lot | 1,000 currencies | Approx. 150,000 JPY |
In other words, the trading volume differs by 100 times between 1 lot and 0.01 lot.
Profit and Loss per Pip Depends on Lot Size
The profit or loss per 1 pip (0.01 JPY/0.0001 USD) in the exchange rate varies greatly depending on the lot size:
- 1.0 Lot moving 1 pip → Approx. 1,000 JPY in P/L
- 0.1 Lot moving 1 pip → Approx. 100 JPY in P/L
- 0.01 Lot moving 1 pip → Approx. 10 JPY in P/L
For example, if you buy USD/JPY with 1 lot and it moves 30 pips against you, what would happen?
1,000 JPY × 30 pips = 30,000 JPY in losses
What!? Just 30 pips of movement with 1 lot causes a 30,000 JPY loss!?
Yes, the larger the lot, the bigger the profit or loss from a small price movement. This is the danger and importance of lot management.
30 pips is a common daily price movement that can occur in an hour or so for USD/JPY. That’s why lot management = money management is a matter of life and death.
The 2% Rule: Explaining the Money Management Principles of Pro Traders
Now we get to the core of money management. Let’s go into detail on the “2% Rule” practiced by professional traders.
Definition of the 2% Rule
“You should only risk up to 2% of your account balance per trade”
This is the iron rule followed by professional traders.
Isn’t 2% a bit low? Can you really make money with that?
“Surviving” is more important than “making money”. The 2% Rule is designed to “never die” at all costs.
Why 2%? The Mathematical Rationale
The 2% Rule has a clear mathematical rationale. Let’s calculate the remaining balance in the case of consecutive losses:
| Risk Setting | Balance After 5 Losses | Balance After 10 Losses | Losses Until Bankruptcy |
|---|---|---|---|
| 2% Rule | Approx. 90% | Approx. 82% | Even after 50 losses, 36% remains |
| 5% Rule | Approx. 77% | Approx. 60% | Bankrupt after 20 losses |
| 10% Rule | Approx. 59% | Approx. 35% | Virtually instant death after 10 losses |
Calculation Formula: Remaining Balance = (1 – Risk%)^Number of Losses
- 2% for 50 losses: 0.98^50 = 0.364 (Remaining 36.4%)
- 5% for 20 losses: 0.95^20 = 0.358 (Remaining 35.8%)
- 10% for 10 losses: 0.90^10 = 0.349 (Remaining 34.9%)
To reach about 35% remaining balance, the 2% Rule requires 50 consecutive losses, while the 10% Rule only needs 10 consecutive losses.
Importance of the 2% Rule at Prop Firms
Prop firms have a daily loss limit (often 5%). Let’s look at the relationship between this and the 2% Rule:
- With a 2% risk, two consecutive losses would still be -4% and survivable
- With a 5% risk, a single loss would be just barely within the limit
- With a 10% risk, it would be… instant disqualification!
In other words, the 2% Rule is the “life insurance” for prop firms.
▶ Related Article: 【Latest 2025】Fintokei’s Rules Explained in Full | Disqualification Conditions and Tips for Passing
【Core】The Formula for Lot Calculation | Doing It with Just a Calculator
This is the core of today’s lesson. We’ll explain the formula for calculating the appropriate lot size.
Teacher, I’m not good at math…
It’s fine with a calculator! It’s just multiplication and division.
The Lot Calculation Formula
Lot = Account Balance × Risk% ÷ SL in pips × Value of 1 pip
Explanation of the Elements: