The Core Philosophy
Professional risk management isn't just about avoiding losses—it's about controlling them with mathematical precision. It involves risking a maximum of 1-2% per trade, calculating exact position sizes, and maintaining a minimum 1:2 risk/reward ratio. The goal is to survive the worst days so you can profit from the best ones.
In This Module
The Reality of Trading Risk
Here's the uncomfortable truth: you can have a 60% win rate and still blow your account. Conversely, you can be right only 40% of the time and make a fortune. The difference isn't your strategy's entry signals—it's your risk management.
Professional traders view trading as a game of probabilities, not certainties. They focus on the distribution of outcomes over hundreds of trades, whereas amateurs obsess over the outcome of the next trade.
The Mathematics of Ruin
Losses work exponentially against you. As your drawdown deepens, the return required to break even skyrockets. This asymmetry is why capital preservation is the #1 rule.
The 1% Rule
The golden rule of survival is simple: never risk more than 1-2% of your account equity on a single trade. This ensures that even a catastrophic losing streak (which will happen) won't take you out of the game.
The Professional
✓ Can easily recover and continue trading.
The Amateur
✗ Account destroyed. Recovery nearly impossible.
Position Sizing
Knowing how much to risk is step one. Knowing how many lots to trade to achieve that risk is step two. This is where the Position Sizing Formula comes in.
The Formula
Real World Example
1. Define Risk
Account: $50,000
Risk (1%): $500
2. Measure Stop
Entry: 1.0850
Stop: 50 pips
3. Calculate Size
$500 ÷ (50 × $10)
Size: 1.0 Lot
Stop Loss Mastery
A stop loss isn't just a safety net—it's your strategic exit point. It marks the exact price where your trade idea is invalidated.
Technical Invalidation
Place stops behind support/resistance levels where the market structure would be broken. Never place stops based on a fixed dollar amount you're willing to lose.
Never Widen Stops
You can move a stop to breakeven or profit, but never move it further away to give a losing trade "more room." That is the path to ruin.
Account for Spread
Always add the spread to your stop placement. If you're selling, your stop needs to be above the high plus the spread to avoid getting stopped out by the ask price.
Set & Forget
Once your stop is set, honor it. Removing a stop loss mid-trade changes you from a trader managing risk to a gambler hoping for luck.
Risk/Reward Ratio
This is your edge. By targeting more profit than you risk (asymmetric returns), you can be profitable even if you lose more trades than you win.
Managing Drawdown
Drawdowns are inevitable. The key is to have a protocol for when they happen, rather than reacting emotionally.
Normal Variance
Business as usual. Review trades for errors, but stick to the strategy.
Caution Zone
Reduce position size by 25%. Analyze if market conditions have changed.
Danger Zone
Stop trading. Re-evaluate strategy. Take a break to reset psychology.
The Psychological Edge
Risk management is 10% math and 90% discipline. The math is easy; sticking to it when you're scared or greedy is the hard part.
Pre-Trade Checklist
Action Steps
Module Tasks
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Trade Setups
Learn how to identify, analyze, and execute high-probability forex trade setups across all currency pairs.