Risk Management Basics

Effective risk management is the foundation of successful trading. Learn how to protect your capital while maximizing returns.

The Golden Rules

Never Risk More Than You Can Afford to Lose

Only trade with money you can afford to lose completely.

The 1-2% Rule

Never risk more than 1-2% of your account on a single trade.

Risk/Reward Ratio

Aim for at least 1:2 risk/reward ratio on every trade.

Position Sizing

Fixed Percentage Method

Risk a fixed percentage of your account on each trade.

Position Size = (Account × Risk %) / (Entry - Stop Loss)

Example

• Account: $10,000
• Risk per trade: 2% ($200)
• Entry: $100
• Stop loss: $95
• Position size: $200 / $5 = 40 shares

Stop Loss Types

Fixed Stop

Set at a specific price level.

Trailing Stop

Follows the price as it moves in your favor.

Volatility Stop

Based on ATR (Average True Range).

Time Stop

Exit if the trade hasn't worked within a certain timeframe.

Diversification

Don't put all your eggs in one basket:

• Trade multiple assets
• Use different strategies
• Spread across timeframes

Emotional Control

Trading Psychology

• Stick to your plan
• Accept losses as part of trading
• Don't revenge trade
• Take breaks when stressed

Risk Management Checklist

• [ ] Position size calculated
• [ ] Stop loss placed
• [ ] Take profit levels set
• [ ] Risk/reward ratio acceptable
• [ ] Total portfolio risk within limits
• [ ] Emotional state checked