Risk Management
The only thing standing between you and blowing up your account.
Every trader who's blown up an account, myself included, did so because they broke their risk rules. Not because of a bad strategy. Not because of bad luck. Because they risked too much, held too long, or didn't have rules at all.
This guide gives you the exact framework I use and teach. No theory, just the rules that keep you in the game.
The Core Principle
"Survival first. Profits second."
You cannot compound gains if you blow up. You cannot learn if you're out of capital. Every decision starts with one question: "How much can I lose?"
The Three Layers of Risk Protection
Professional risk management works in layers. Each layer catches what the previous one misses.
Per-Trade Risk
The Rule: Never risk more than 1-2% of your account on a single trade.
Why: Even a 10-trade losing streak (which happens) only costs you 10-20%. You can recover.
Daily Loss Limit
The Rule: Stop trading when you hit 2-3x your per-trade risk.
Why: Bad days happen. This prevents bad days from becoming catastrophic days.
Weekly/Monthly Limits
The Rule: Reduce size or pause when hitting -5% weekly or -10% monthly.
Why: Extended drawdowns require stepping back, not pushing harder.
Position Sizing: The Math
Position sizing is how you translate "I'm willing to risk $100" into "I should trade X contracts/shares."
The Position Sizing Formula
This is the only formula that matters. Memorize it.
Futures Example (MES)
- Account: $5,000
- Risk per trade: $50 (1%)
- Stop: 8 points from entry
- MES = $5 per point
- Math: $50 ÷ (8 × $5) = 1.25 → 1 contract
Stock Example
- Account: $25,000
- Risk per trade: $250 (1%)
- Stock price: $150
- Stop: $2 from entry
- Math: $250 ÷ $2 = 125 shares
Key Insight
Your position size should change based on stop distance. Wide stop = smaller size. Tight stop = larger size. The risk stays constant.
The Risk Decision Hierarchy
Before every trade, run through this checklist in order:
Am I within my daily limit?
If I've hit my daily loss limit, I don't trade. Period. Tomorrow is another day.
Where is my stop?
Define the exit before the entry. If I can't define a logical stop, I don't take the trade.
What's my position size?
Calculate using the formula. Risk amount ÷ stop distance. No exceptions.
Is the reward worth the risk?
Minimum 1.5:1 reward-to-risk. Preferably 2:1 or better. Bad R:R = skip the trade.
Execute and honor the plan
Once in, the stop is sacred. Moving it to avoid a loss is the #1 account killer.
Risk Sizing Tables
Reference tables for different account sizes. Adjust based on your personal risk tolerance.
| Account Size | 1% Risk | 2% Risk | Daily Limit (3%) | Weekly Limit (5%) |
|---|---|---|---|---|
| $2,500 | $25 | $50 | $75 | $125 |
| $5,000 | $50 | $100 | $150 | $250 |
| $10,000 | $100 | $200 | $300 | $500 |
| $25,000 | $250 | $500 | $750 | $1,250 |
| $50,000 | $500 | $1,000 | $1,500 | $2,500 |
Beginner Recommendation
- Start with 0.5-1% risk per trade until consistently profitable
- Use fixed dollar amounts ($25, $50, $100) rather than percentages initially
- Size so small that losing doesn't affect your emotions or judgment
Risk Management Mistakes That Kill Accounts
Moving Stops to Avoid Loss
What happens: Trade goes against you. Instead of taking the planned $50 loss, you move your stop. Now it's a $200 loss. Then $500.
The fix: Stops are sacred. If your stop logic was wrong, take the loss and learn. Never move a stop to avoid being wrong.
Sizing Up After Wins
What happens: You have a great week. You feel confident. You double your size. Then a normal pullback wipes out 2 weeks of gains in one day.
The fix: Size changes should be gradual and based on account growth, not feelings. Increase 10-20% max after a full month of consistency.
No Daily Loss Limit
What happens: Bad morning. You try to make it back. It gets worse. You trade bigger to recover faster. Account down 15% in one day.
The fix: Set a hard daily limit. When you hit it, close the platform. Literally walk away. Tomorrow is another day.
Averaging Down Without a Plan
What happens: Position goes against you. You add more, hoping for a better average. It keeps going. Now you have double the loss.
The fix: If averaging is part of your strategy, define it in advance with limits. Otherwise, adding to losers is just hoping.
"This One Is Different"
What happens: You see a "perfect" setup. You risk 5x your normal amount because "this one can't lose." It loses.
The fix: No trade is ever certain. Your edge plays out over 100+ trades. One trade should never matter that much.
The Psychology of Risk
Why Risk Management Is Hard
It's not about math. It's about emotions. The math is simple. The discipline is not.
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Losses feel 2x worse than wins feel good
This is called loss aversion. Your brain will try to avoid taking the stop, even when it's the right move.
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Small size feels "not worth it"
Your ego wants to trade big. But small, consistent gains compound faster than big swings with blowups.
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Risk rules feel limiting until they save you
Every trader who survives has a story of risk rules preventing disaster. You'll have yours too.
The Mental Shift That Changes Everything
Stop thinking about what you might win.
Start thinking about what you're willing to lose.
Every trade is a bet. Define your bet before you make it. Accept the potential loss before you enter.
When you truly accept the loss upfront, you can execute without fear, take stops without resentment, and trade your plan without emotional interference.
Create Your Risk Rules
Fill this out and stick it next to your monitor:
My Risk Rules
I commit to following these rules every trade, every day.
Signature: _________________ Date: _______
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