Risk Management
Risk management is the difference between surviving and blowing up your account.
This hub covers every risk principle — from position sizing to drawdown limits. Master this, and you’ll survive long enough to profit.
Core Concepts
position-sizing
How much to risk per trade.
Risk Per Trade
How much capital to risk per trade.
Reward Ratio
Potential profit vs potential loss.
stop-loss
Automatic loss limits.
stop-loss.md >>>
drawdown
Managing losing streaks.
drawdown.md >>>
daily-limits
Intraday risk caps.
daily-limits.md >>>
correlation
Portfolio risk.
correlation.md >>>
Mathematical Foundation
Position Sizing Formula
Position Size = Risk Amount ÷ Stop in Pips ÷ Pip Value
Example:
Risk: $100
Stop: 50 pips
Pip Value: $10/pip
Position = $100 ÷ 50 ÷ $10 = 0.2 lots
Risk Per Trade Formula
Risk % = Risk Amount ÷ Account Balance × 100
Example:
Account: $10,000
Risk: $100
Risk % = $100 ÷ $10,000 × 100 = 1%
Risk/Reward Formula
R:R Ratio = Target Profit ÷ Risk Amount
Example:
Entry: 1.1000
Stop: 1.0950 (50 pip risk)
Target: 1.1100 (100 pip reward)
R:R = 100 ÷ 50 = 2:1
Kelly Criterion Formula
f* = (bp - q) ÷ b
Where:
f* = fraction to bet
b = odds received (reward/risk)
p = winning probability
q = losing probability (1 - p)
Example:
Win rate: 50%
Average reward: 2:1
b = 2
p = 0.50
q = 0.50
f* = (2 × 0.50 - 0.50) ÷ 2 = 0.25 or 25%
Drawdown Recovery Formula
Recovery % = -Loss %
Example:
Account: $10,000 → $8,000 (-20%)
Recovery needed: ($2,000 ÷ $8,000) × 100 = 25%
Current $8,000 needs 25% return to reach $10,000
Risk Tables
Account Risk Table
| Account | Risk 1% | Risk 2% | Max Daily |
|---|---|---|---|
| $1,000 | $10 | $20 | $50 |
| $5,000 | $50 | $100 | $250 |
| $10,000 | $100 | $200 | $500 |
| $25,000 | $250 | $500 | $1,250 |
| $50,000 | $500 | $1,000 | $2,500 |
| $100,000 | $1,000 | $2,000 | $5,000 |
Position Size Table (Forex)
| Account | Stop 20pips | Stop 50pips | Stop 100pips |
|---|---|---|---|
| $1,000 | 0.5 lot | 0.2 lot | 0.1 lot |
| $5,000 | 2.5 lots | 1.0 lot | 0.5 lot |
| $10,000 | 5.0 lots | 2.0 lots | 1.0 lot |
| $25,000 | 12.5 lots | 5.0 lots | 2.5 lots |
Drawdown Limits Table
| Drawdown | Action |
|---|---|
| 5% | Normal |
| 10% | Reduce size 50% |
| 15% | Stop trading |
| 20% | Review system |
Risk/Reward Requirements
| Win Rate | Min R:R Needed |
|---|---|
| 70% | 0.43 |
| 60% | 0.67 |
| 50% | 1.00 |
| 40% | 1.50 |
| 30% | 2.33 |
Risk Integration
Risk → Strategy
Scalping
- Risk: 0.25-0.5% per trade
- Stop: Tight (5-10 pips)
- High frequency
Day Trading
- Risk: 0.5-1% per trade
- Stop: 20-50 pips
- Intraday
Swing Trading
- Risk: 1-2% per trade
- Stop: 50-100 pips
- Multi-day
Position Trading
- Risk: 2-3% per trade
- Stop: 100+ pips
- Weeks
Risk → Psychology
| Risk Level | Psychological Effect |
|---|---|
| 1% | Comfortable |
| 2% | Normal |
| 5% | Anxiety |
| 10% | Fear |
Rule: Stay below 2% for psychological comfort.
Risk → Capital Growth
| Monthly Return | 10% loss monthly |
|---|---|
| 5% | 1.5 months to recover |
| 10% | 2.5 months to recover |
| 20% | 6+ months to recover |
Key: Smaller losses = faster recovery.
Common Mistakes
1. No Stop Loss
Problem: Hope instead of stop.
Result: Blow account.
Fix: Always use stops.
2. Over-Risking
Problem: Too big per trade.
Result: Psychology breaks.
Fix: Start at 1%, max 2%.
3. Moving Stops
Problem: Moving stop to avoid loss.
Result: Larger loss.
Fix: Set and forget.
4. Ignoring Correlation
Problem: All positions in correlated assets.
Result: Not diversified.
Fix: Check correlation.
5. No Daily Limit
Problem: Chase losses.
Result: Blow account.
Fix: Set daily max.
Internal Links
Navigate risk:
- position-sizing — Sizing
- risk-per-trade — Risk per trade
- risk-reward-ratio — R:R ratio
- stop-loss — Stops
- drawdown — Drawdown
- daily-limits — Daily caps
Connect to:
- strategies — Strategy application
- psychology — Psychology
- strategies — System building
Your Next Step
Start with:
position-sizing.md >>> (first priority)
risk-per-trade.md >>> (define amounts)
stop-loss.md >>> (protect capital)
Risk management = trading survival.