Module 17: Risk Management
Key Takeaways
- Risk management, not entries, is what makes traders profitable long term.
- Risk a small fixed percentage (often 1%) per trade.
- Position size is calculated from your stop distance, not guessed.
- A positive risk-to-reward ratio lets you profit even with a sub-50% win rate.
Why risk management matters
You can have a great strategy and still go broke without risk management. It controls how much you lose when you’re wrong — and you will be wrong often. Protecting capital keeps you in the game long enough for your edge to play out.
Position sizing
Position size is determined by your account, risk percentage and stop distance: Size = (Account × Risk%) / Stop distance. Example: $10,000 account, 1% risk ($100), stop 50 pips away → size so that 50 pips = $100. Try the position size calculator in Resources.
Risk to reward ratio
R:R compares what you risk to what you aim to gain. Risking $100 to make $200 is 1:2. With 1:2, you can be right only 40% of the time and still profit.
1:2 and 1:3 setups
Aim for at least 1:2. Over 10 trades risking $100 each at 1:2 with a 50% win rate: 5 wins (+$1,000) and 5 losses (−$500) = +$500 net. The maths works because of the ratio.
High win rate ≠ profitable. A trader who wins 80% of the time at 1:0.25 can still lose money. R:R and consistency matter more.
Capital preservation
Your first job is to not lose money. Avoid huge positions, over-leverage and “all-in” trades. A 50% loss requires a 100% gain just to break even — protect your capital fiercely.
Maximum daily loss
Set a hard daily loss limit (e.g. 3% of account). When you hit it, stop trading for the day. This prevents one bad day — and revenge trading — from destroying your account.
Drawdown management
A drawdown is a decline from your account peak. Reduce position size during drawdowns, review your journal for what’s going wrong, and don’t try to “trade your way out” aggressively.
Decide your stop loss and position size BEFORE you enter. If a setup doesn’t offer a sensible stop, skip it.
Frequently Asked Questions
Most professionals risk 0.5–2% per trade. Beginners should stay at or below 1%.
Beyond a structural level (recent swing high/low or S/R), not at a random distance. Then size the position to that stop.