Why does risk management exist?
In trading, losses are inevitable. Even the best traders finish 40-50% of positions in the red. Success comes not from always being right — but from keeping losses small when wrong and profits large when right. Risk management is not optional — it is the foundation of survival.
The 1% Rule
Never risk more than 1-2% of total capital on any single position.
- With $10,000 → max risk per position is $100-$200
- 10 consecutive 1% losses = 10% drawdown (recoverable)
- 10 consecutive 10% losses = 65% drawdown (catastrophic)
Stop-loss: mandatory tool
Set stop-loss BEFORE entering a position, below a key support level. When price reaches it, the position closes automatically — no emotions involved.
Risk/Reward Ratio
Before every trade: if stop-loss costs me $50, I target $100 profit = 1:2 R/R. At 1:2, you are profitable even if only 34% of positions close in profit.
Position sizing formula
Position size = (Capital × %Risk) / %Stop-loss
Example: $10,000, 1% risk, 5% stop-loss → position = ($10,000 × 0.01) / 0.05 = $2,000