Table of Contents
1
The Foundation of Trading Success
Risk management is the cornerstone of successful trading. While many traders focus on finding the perfect entry points, the real key to long-term profitability lies in protecting your capital and managing your risk exposure effectively.
Core Risk Management Principles
Capital Protection
- •Never risk more than 1-2% per trade
- •Set daily and weekly loss limits
- •Use proper position sizing
- •Maintain adequate account balance
- •Diversify across multiple strategies
Psychological Control
- •Stick to your trading plan
- •Avoid emotional decision-making
- •Accept losses as part of trading
- •Don't chase losses
- •Take regular breaks
2
Position Sizing Mastery
Position sizing is the most critical aspect of risk management. It determines how much capital you risk on each trade and directly impacts your long-term success.
Kelly Criterion Method
Formula
- • K% = (W × R - L) / R
- • W = Win rate (decimal)
- • R = Average win / Average loss
- • L = Loss rate (1 - W)
Example
- • Win rate: 60% (0.6)
- • Avg win: $200, Avg loss: $100
- • R = 2.0, L = 0.4
- • K% = (0.6 × 2 - 0.4) / 2 = 0.4
- • Risk 40% of account per trade
Fixed Percentage Method
Conservative Approach
- • Risk 1% per trade maximum
- • Suitable for beginners
- • Slower growth, lower drawdowns
- • Protects against large losses
Aggressive Approach
- • Risk 2-3% per trade
- • For experienced traders
- • Faster growth potential
- • Higher volatility
Master Risk Management
Remember: It's not about being right all the time, it's about managing your risk when you're wrong. Protect your capital and let your winners run.