Risk Management Basics
Protect your capital with essential risk management strategies
Risk management is the most important skill in trading. Without proper risk management, even the best strategy will eventually fail. Learn to protect your capital first, and profits will follow.
The 1-2% Rule
Never risk more than 1-2% of your account on a single trade. This ensures you can survive a losing streak and stay in the game long enough to recover.
- $10,000 account = $100-200 max risk per trade
- Allows for 50+ consecutive losses before account depletion
- Reduces emotional decision-making
Position Sizing
Position size determines how much you trade based on your risk tolerance and stop-loss distance. Proper position sizing is crucial for consistent risk management.
- Calculate based on account size and risk percentage
- Adjust for stop-loss distance
- Never increase size after losses
Risk-Reward Ratio
The risk-reward ratio compares potential profit to potential loss. Aim for at least 1:2, meaning your potential profit is twice your potential loss.
Diversification
Do not put all your eggs in one basket. Spread risk across different instruments and avoid correlated trades that could all move against you simultaneously.
Key Takeaways
- Risk only 1-2% of your account per trade
- Calculate position size based on stop-loss distance
- Aim for minimum 1:2 risk-reward ratio
- Diversify to reduce overall portfolio risk