Why Risk Management is Crucial
- Even the best strategy fails without risk control
- Prevents big losses → keeps you in the game long term
- Allows consistent growth instead of emotional gambling
The Golden Rule of Risk
- Risk only 1–2% of your total account per trade
- Example: $1,000 account → max risk per trade = $10–20
- This way even 10 losses in a row won’t blow your account
Position Sizing Formula
How to calculate lot/position size: Position Size=Account RiskEntry Price−StopLossPosition \, Size = \frac{Account \, Risk}{Entry \, Price – Stop Loss}PositionSize=EntryPrice−StopLossAccountRisk
Example:
- Account: $1,000
- Risk per trade: 1% → $10
- Entry: $100
- Stop Loss: $95 (risk = $5 per share)
- Position Size = $10 ÷ $5 = 2 shares
Risk/Reward Ratio (R:R)
- Always trade with R:R ≥ 1:2
- If risking $10, aim to make $20
- Even with 40% win rate, you can still be profitable
Advanced Concepts
- Kelly Criterion: Math-based formula for optimal bet sizing
- Volatility-based Stops: Wider SL in volatile markets, tighter SL in stable markets
- Diversification: Don’t risk on correlated assets (e.g., BTC & ETH at the same time)
Common Mistakes
- Moving stop-loss further (never do this)
- Overleveraging with 10–20x without plan
- Risking a fixed amount ($100 every trade) instead of % of account
- Entering multiple trades at once that all depend on same market direction