Core Framework

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.

Layer 1

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.

Example: $10,000 account → Max $100-200 risk per trade
Layer 2

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.

Example: $100 per-trade risk → Stop at $200-300 daily loss
Layer 3

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.

Example: At -5% weekly, cut size in half. At -10% monthly, review everything.

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

Position Size = Risk Amount ÷ Stop Distance (in $)

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:

1

Am I within my daily limit?

If I've hit my daily loss limit, I don't trade. Period. Tomorrow is another day.

2

Where is my stop?

Define the exit before the entry. If I can't define a logical stop, I don't take the trade.

3

What's my position size?

Calculate using the formula. Risk amount ÷ stop distance. No exceptions.

4

Is the reward worth the risk?

Minimum 1.5:1 reward-to-risk. Preferably 2:1 or better. Bad R:R = skip the trade.

5

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.

  • 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.

  • Small size feels "not worth it"

    Your ego wants to trade big. But small, consistent gains compound faster than big swings with blowups.

  • 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

My per-trade risk: $_____ or _____% of account
My daily loss limit: $_____ (___x per-trade risk)
My weekly loss limit: $_____ or _____% of account
When I hit daily limit: I close platform and _____________
Minimum R:R ratio: _____:1

I commit to following these rules every trade, every day.

Signature: _________________ Date: _______

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