Risk Management 101: Protect Your Trading Capital

Introduction

Risk management is the foundation of long-term trading success. Without it, even the best trading strategy will eventually blow up your account.

The Golden Rule: Never Risk More Than 1-2% Per Trade

Professional traders rarely risk more than 1-2% of their account on any single trade. Smaller risk means you can survive losing streaks.

Position Sizing Formula

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

Example:

• Account: $10,000
• Risk: 1% ($100)
• Entry: $50, Stop Loss: $48
• Position Size = $100 / $2 = 50 shares

Setting Stop Losses

A stop loss is a predetermined exit price. Types include:

Technical Stop

Based on chart levels (support, moving averages)

Percentage Stop

Fixed percentage from entry (e.g., 5%)

ATR-Based Stop

Based on Average True Range for volatility adjustment

Key Rule: Always determine your stop loss BEFORE entering a trade.

Risk-Reward Ratio

Only take trades where potential reward exceeds risk:

• 1:1.5 - Acceptable
• 1:2 - Good
• 1:3 - Excellent

The Maximum Daily Loss Rule

Set a maximum daily loss limit (e.g., 3% of account). When you hit it, stop trading for the day.

Conclusion

Risk management isn't about avoiding losses—it's about surviving them. Protect your capital, and you'll always have another chance to profit.