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Risk Management: Protecting Your Capital 🛡️

Pro Insight

Remember: It's not about how much you make, but how much you keep! Professional traders focus on risk before reward. 💰

The 1% Rule​

Never risk more than 1% of your trading capital on a single trade.

Real-World Example: With a $10,000 account, your maximum risk per trade is $100 (1%). If you're buying AAPL at $170 and placing a stop loss at $165, your position size would be:

  • Risk per share = $5 ($170 - $165)
  • Position size = $100 ÷ $5 = 20 shares
  • Total position value = 20 × $170 = $3,400
Position Size Formula

Position Size = (Account × Risk%) ÷ (Entry - Stop Loss)

Risk-Reward Ratio​

Aim for minimum 1:2 risk-reward ratio.

Position Sizing Calculator​

Account SizeRisk %Risk $EntryStopPosition Size
$10,0001%$100$100$9850 shares
$10,0001%$100$100$9520 shares
$10,0001%$100$100$9010 shares

Risk Management Rules​

1. Maximum Daily Loss​

  • Set daily loss limit (e.g., 3% of account)
  • Stop trading when reached
  • Reset next trading day

2. Maximum Position Size​

  • Never exceed 5% of account in one position
  • Scale into larger positions
  • Consider market volatility

3. Correlation Risk​

  • Avoid multiple positions in correlated markets
  • Spread risk across sectors
  • Monitor total portfolio risk

Stop Loss Strategies​

1. Technical Stops​

  • Below support levels
  • Above resistance levels
  • Outside price channels

2. Volatility-Based Stops​

  • ATR-based stops
  • Percentage-based stops
  • Time-based stops

3. Time Stops​

  • Maximum holding period
  • End of day exits
  • Pre-news exits
Common Risk Management Mistakes

❌ Risking too much per trade ❌ Moving stops to avoid losses ❌ Averaging down on losing trades ❌ Not having a pre-defined exit plan

Portfolio Heat Management​

Monitor your total portfolio risk exposure.

Real-World Example: Let's say you have three open positions:

  1. TSLA: $1,000 risk (0.5% of account)
  2. MSFT: $1,400 risk (0.7% of account)
  3. GOOGL: $600 risk (0.3% of account) Total portfolio heat: 1.5% of account at risk
Maximum Heat Rules
  • Total portfolio risk < 6%
  • Correlated positions < 2% (e.g., don't risk 2% across multiple tech stocks)
  • Single sector risk < 4%

Practice Exercises​

  1. Position Sizing Practice

    • Calculate various position sizes
    • Practice with different stops
    • Track theoretical outcomes

  2. Risk Analysis

    • Review past trades
    • Calculate actual R-multiples
    • Optimize position sizing

Risk Management Checklist​

  • Calculate position size
  • Check risk-reward ratio
  • Verify stop placement
  • Check portfolio heat
  • Review correlation risk
  • Set profit targets
  • Plan exit strategy
Key to Success

Remember these 3 rules:

  1. Protect your capital
  2. Keep position sizes consistent
  3. Never risk what you can't afford to lose

Advanced Risk Concepts​

1. Risk Adjustment​

  • Increase size in strong trends
  • Reduce size in choppy markets
  • Scale in/out of positions

2. Portfolio Correlation​

  • Monitor sector exposure
  • Track beta-weighted risk
  • Balance long/short exposure

3. Risk-Adjusted Returns​

  • Sharpe Ratio
  • Sortino Ratio
  • Maximum Drawdown
Pro Trading Tip

The best traders aren't the ones who make the most money, but those who keep the most over time! 🎯