Risk Management

Risk management is the most important skill in trading. Learn how to protect your capital, size your positions correctly, and manage your exposure to ensure long-term success.

Intermediate Level
20 min read
Essential Skills
Why Risk Management is Everything

You can have the best trading strategy in the world, but without proper risk management, you'll eventually lose all your money. Risk management is what separates professional traders from gamblers.

The goal isn't to avoid losses entirely – that's impossible. The goal is to ensure that when you do lose (and you will), those losses are small and manageable. This allows you to stay in the game long enough for your edge to play out.

Critical Truth

More traders fail due to poor risk management than poor market analysis. You can be wrong about market direction 60% of the time and still be profitable with good risk management.

Position Sizing Formula
Calculate the correct position size for any trade

Position Size Calculation

Position Size = (Account Size × Risk %) ÷ Stop Loss Distance
Where Risk % is typically 1-3% of your account balance

Account Size

Your total trading capital

Risk %

1-3% of account per trade

Stop Distance

Pips/points to stop loss

Position Sizing Examples

Conservative Trader
1% Risk
Low risk approach suitable for beginners or smaller accounts
$10,000
Account Size
1%
Risk %
$100
Risk Amount
50 pips
Stop Loss
0.2 lots
Position Size
Moderate Trader
2% Risk
Balanced approach for experienced traders with adequate capital
$50,000
Account Size
2%
Risk %
$1,000
Risk Amount
30 pips
Stop Loss
3.33 lots
Position Size
Aggressive Trader
3% Risk
Higher risk for experienced traders with strong risk management skills
$100,000
Account Size
3%
Risk %
$3,000
Risk Amount
40 pips
Stop Loss
7.5 lots
Position Size
Essential Risk Management Rules

Never risk more than 1-3% per trade

This ensures you can survive a long losing streak without blowing your account

Use stop losses on every trade

Define your maximum loss before entering any position

Risk-reward ratio of at least 1:2

Your potential profit should be at least twice your potential loss

Don't risk more than 10% total exposure

Limit your total market exposure to avoid correlation risk

Keep detailed trading records

Track your performance to identify and improve weaknesses

Common Risk Management Mistakes

Revenge Trading

Increasing position size after losses to 'get even quickly'

Solution: Stick to your predetermined risk per trade regardless of recent performance

Overconfidence After Wins

Increasing risk after a winning streak

Solution: Maintain consistent position sizing based on account size, not recent results

No Stop Loss

Hoping losing trades will turn around

Solution: Always set stop losses before entering trades and honor them

Risking Too Much

Using position sizes that are too large for the account

Solution: Never risk more than 1-3% of your account on a single trade

Practice What You've Learned

Try the Marble GameReview Probability Basics
Discussion: Risk Management

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