Module 10: Risk Management and Position Sizing

Risk management is what separates profitable traders from blown accounts. No strategy, no matter how good, will save you without proper risk control.[^28][^29]

The 1-2% Rule

Never risk more than 1-2% of your total trading capital on a single trade. For beginners, lean toward 1% until you have a proven track record.[^29][^28]

Account Size	1% Risk Per Trade	2% Risk Per Trade
$1,000	$10	$20
$5,000	$50	$100
$10,000	$100	$200
$25,000	$250	$500
$50,000	$500	$1,000[^28]

Position Sizing Formula

Position sizing calculates exactly how many shares, lots, or units to trade based on your risk parameters:[^30][^28]

[ \text{Position Size} = \frac{\text{Account Risk (in dollars)}}{\text{Trade Risk (per unit)}} ]

Where:

Account Risk = Account Balance × Risk Percentage
Trade Risk = Entry Price − Stop-Loss Price (for longs)[^28]

Example: $10,000 account, 1% risk = $100 risk per trade. You enter a stock at $50 with a stop-loss at $48. Trade risk per share = $2. Position size = $100 / $2 = 50 shares.[^30][^28]

Risk-to-Reward Ratio (RRR)

Before entering any trade, calculate the ratio of potential profit to potential loss:[^11]

[ \text{RRR} = \frac{\text{Distance to Take-Profit}}{\text{Distance to Stop-Loss}} ]

Only take trades with a minimum 2.5:1 or 3:1 RRR. This means your potential reward should be at least 2.5-3 times your potential risk. With a 3:1 RRR, you can be wrong 60% of the time and still be profitable.[^10][^11]

Stop-Loss Placement

Your stop-loss should be placed at a logical price level where your trade thesis is invalidated:[^8]

For demand zone trades: Below the demand zone boundary.
For support trades: Below the support level.
For chart pattern trades: Beyond the pattern's invalidation point.

Never use arbitrary stop-loss distances (e.g., "always 10 pips"). Your stop should be based on market structure.

Maximum Daily Loss Limit

Set a maximum daily loss of 2-3% of your account. If you hit this limit, stop trading for the day. This prevents revenge trading and catastrophic drawdowns.[^8]

The Mathematics of Recovery

Losses require disproportionately larger gains to recover:

Loss	Gain Needed to Recover
10%	11.1%
20%	25%
30%	42.9%
50%	100%