Why Risk Management Matters
You can have the best trading strategy in the world, but if you have poor risk management, you will eventually blow your account. Risk management is the foundation of successful trading, regardless of whether you're a day trader, swing trader, or position trader.
The 1% Rule
Never risk more than 1% of your account balance on a single trade.
- Example: Account = $10,000.
- Max Risk per Trade: $100.
This rule protects you from common trading mistakes and helps you survive losing streaks.
Stop Loss is Mandatory
Always use a Stop Loss (SL). It is your insurance policy against market crashes. Learn more about price action trading to identify optimal stop loss levels.
- Determine your entry using technical analysis.
- Determine where your trade idea is invalid (Stop Loss).
- Calculate your position size so that if price hits SL, you only lose 1%.
Risk/Reward Ratio (R:R)
Aim for trades where the potential profit is at least 2x the risk.
- Risk: $100
- Target Reward: $200+
- R:R: 1:2
This way, even if you only win 40% of your trades, you can still be profitable. Combine this with proper technical analysis for better entry timing.
Position Sizing
Position sizing is crucial for risk management. Your position size should be based on:
- Your account balance
- Your risk percentage (1% rule)
- The distance to your stop loss
Learn more about how to trade forex to understand position sizing in practice.
Summary
Risk management is not optional—it's mandatory. Without proper risk management, even the best trading strategies will fail.
Key Takeaways:
- Never risk more than 1% per trade
- Always use stop loss
- Aim for 1:2 risk/reward minimum
- Position size based on stop loss distance
- Protect your capital above all else