Risk Management
The difference between profitable traders and others. Master the art of protecting your capital while maximizing your gains.
⚠️ Golden Rule of Trading
"Never risk more than you can afford to lose."
- • First rule is not to lose money
- • Second rule is never forget the first
- • Without capital, no trading possible
Why Risk Management
Risk management is THE most important skill in trading. Without it, even the best strategy will lead to ruin.
Why It's Crucial
- Protecting capital is the priority
- 90% of traders fail due to poor management
- Allows survival through losing streaks
- Builds confidence and reduces stress
- Transforms trading into a business
📊 Mathematics of Recovery
The bigger the loss, the harder it is to recover
Position Sizing
Determining how much to risk on each trade is crucial for long-term survival.
📐 Calculation Formulas
Size = (Capital × % Risk) / Stop Loss in pips
f = (p × b - q) / b
⚠️ DANGER - Double after loss
Position Sizing Rules
- Risk 1-2% max per trade (beginners: 0.5-1%)
- Adjust according to market volatility
- Reduce during drawdown periods
- Increase progressively with experience
💡 Practical Example
Stop Loss and Protection
The stop loss is your insurance against big losses. NEVER trade without one.
🛡️ Types of Stop Loss
Fixed distance from entry point
Based on support/resistance
Based on volatility (1.5-2 × ATR)
Follows price in profit
❌ Absolutely avoid
📍 Optimal Placement
- Beyond the last swing
- Behind major support/resistance
- Outside market noise
- Never too tight (let it breathe)
- Never too wide (R:R ratio)
❌ Common Mistakes
- Moving stop in loss
- Stop too tight = premature exit
- No stop = blown account
- Emotional vs technical stop
Risk/Reward Ratio
The R:R ratio determines long-term profitability even with a low win rate.
R:R = Potential Profit / Potential Loss
📊 Ratio Examples
🎯 R:R Strategies
- Minimum 1:1.5 to enter
- Ideally aim for 1:2 or more
- Adjust according to probability
- Take partial profits at targets
Profitability Table
| Ratio R:R | Required Win Rate | Long Term Result |
|---|---|---|
| 1:1 | 50% | Break-even |
| 1:2 | 40% | +20% over 100 trades |
| 1:3 | 30% | +20% over 100 trades |
Drawdown Management
Drawdown is the maximum decline in capital. Knowing how to manage it is vital.
Max Drawdown
Historical maximum loss
Current Drawdown
Loss from last peak
Average Drawdown
Average of declines
⚠️ Acceptable Limits
- • Prop Firms: 5-10% max daily, 10-12% max total
- • Personal account: 20-30% max acceptable
- • Beyond 30%: review strategy
🔄 Recovery Plan
- 1Reduce position size by 50%
- 2Return to paper trading if necessary
- 3Analyze causes of losses
- 4Psychological break if needed
- 5Progressive reconstruction
🧠 Psychological Aspect
- Drawdown is part of trading
- Even pros have losing periods
- Focus on process, not results
- Trading journal mandatory
Money Management Rules
A set of strict rules to protect and grow capital.
📅 Daily Rules
- Max 3-5 trades per day
- Stop after 2-3 consecutive losses
- Daily loss limit: 2-3%
- Lock profits after good trade
📅 Weekly Rules
- Weekly review mandatory
- Max drawdown: 5-6%
- Realistic target: 2-5%
- Reduce if negative week
📅 Monthly Rules
- Complete statistical analysis
- Adjust position sizing
- Withdraw profits (50%)
- Strategy re-evaluation
📈 Pyramiding (Scaling)
Add to a winning position
Methods
- • Progressive scale-in
- • Inverted pyramid
- • Fixed additions
Rules
- • Only in profit
- • Stop at breakeven
- • Max 3 additions
Correlation and Diversification
Don't put all your eggs in one basket.
🔗 Types of Correlations
Positive Correlation
- • EUR/USD and GBP/USD
- • AUD/USD and NZD/USD
- • Indices and risk-on
Negative Correlation
- • USD/JPY and EUR/USD
- • Gold and Dollar
- • VIX and S&P500
📏 Diversification Rules
- Max 2-3 correlated positions
- Diversify timeframes
- Mix strategies (trend + range)
- Watch for macro events
💡 Example
3 long positions EUR/USD, GBP/USD, EUR/GBP
1 long EUR/USD, 1 short USD/JPY, 1 long Gold
Psychology and Discipline
Discipline is the bridge between goals and results.
📋 Discipline Rules
- Written trading plan BEFORE entering
- Never revenge trade
- Accept losses as cost of business
- Celebrate good decisions, not gains
- Pre/post market routine
😮 Emotion Management
Fear
- Fear of losing → position too small
- Fear of missing out → FOMO
- Solution: strict rules, backtesting
Greed
- Wanting more → move TP
- Overtrade → too many positions
- Solution: realistic goals
Hope
- Hope for reversal → no SL
- Average down → martingale
- Solution: accept the loss
🕐 Trading Routines
🌅 Morning
- • Analyze markets
- • Define daily plan
- • Check economic calendar
🌙 Evening
- • Trading journal
- • Review trades
- • Prepare tomorrow
Tools and Calculators
Essential tools for effective risk management.
🔧 Calculators
- Position Size Calculator
- Risk/Reward Calculator
- Pip Value Calculator
- Margin Calculator
- Drawdown Calculator
📊 Indicators
- ATR for volatility
- Equity curve for performance
- Maximum Adverse Excursion (MAE)
- Maximum Favorable Excursion (MFE)
📝 Trading Journal
Mandatory
- • Date and time
- • Pair/Instrument
- • Direction (long/short)
- • Entry, SL, TP
- • Trade reason
- • Result in R
Analysis
- • Win rate per setup
- • Average actual R:R
- • Max drawdown
- • Profit factor
- • Sharpe ratio
Prop Firm Specifics
Risk rules specific to challenges and funded accounts.
🎯 Challenge Phase
💼 Funded Account
✅ Winning Strategies
- Start small (0.5% risk)
- Increase progressively
- Avoid Friday (weekend risk)
- Stop 30min before major news
- Respect FIFO if US broker
❌ Fatal Mistakes
- Wanting to finish challenge too fast
- Trading during news (NFP, FOMC)
- Ignoring trailing drawdown
- Overtrading final days
- Not reading complete rules
💡 Pro Tip
Treat the challenge like a real account. The habits you develop during the challenge will be the ones you keep on the funded account. Discipline is the key to long-term success.
🎓 Key Points to Remember
- 1.Never risk more than 1-2% per trade
- 2.Always use a stop loss
- 3.Aim for minimum 1:1.5 R:R ratio
- 4.Keep a detailed trading journal
- 5.Respect your trading plan
- 6.Reduce during drawdown periods
- 7.Don't average down
- 8.Capital preservation is the priority
Important Warning
The information presented on this page is provided for educational and informational purposes only. It does not constitute financial advice, investment recommendations, or trading incentives. Trading carries significant risks of financial losses. Past performance is not indicative of future results. We strongly encourage you to properly educate yourself, practice on a demo account, and never invest more than you can afford to lose. Consult a professional financial advisor before making any investment decision.
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