Risk management basics
Drawdowns, risk per trade and the maths of recovering from losses.
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Lessons
- 01What is risk management in trading?Risk management is the set of rules, decided before you place an order, that limits how much you can lose on one trade and in total. It covers risk per trade, stop placement, position size and total exposure. Its job is keeping you trading through losing streaks, because no method wins every trade.
- 02Drawdown and the maths of recovery.A drawdown is the fall in your account from its highest point to a later low, shown as a percentage. Losses and gains are not symmetric: after losing 50% you need a 100% gain to break even, because the gain is earned on a smaller balance. The gain needed is the loss divided by one minus the loss.
- 03How much to risk per trade.Risk per trade is the money you lose if a trade hits its stop loss. The fixed-percentage rule sets it as a share of your current balance, commonly 1% to 2%, so each loss shrinks the next bet. At 1%, ten losses in a row take a $10,000 account to about $9,044.
- 04Risk-reward ratio and win rate.The risk-reward ratio compares what a trade can lose with what it aims to win, and the win rate is the share of trades that win. Together they decide whether a strategy pays. The win rate you need to break even is risk divided by risk plus reward, so a 1:2 trade needs 33.3% before costs.