15 min read•Last updated: January 2025
The Foundation of Trading Success
Risk management is the difference between successful long-term trading and eventual account blow-up. It’s not about being right all the time - it’s about managing your losses when you’re wrong and maximizing profits when you’re right.Core Risk Management Principles
Position Sizing
Determining the appropriate amount of capital to risk on each trade based on your account size and risk tolerance.
1-2% rule per trade
Kelly Criterion optimization
Fixed fractional method
Stop Losses
Predetermined exit points that limit your losses when trades move against you.
Technical stop levels
Percentage-based stops
Time-based exits
Diversification
Spreading risk across different assets, sectors, and strategies to reduce overall portfolio risk.
Asset class diversification
Sector diversification
Geographic diversification
Risk-Reward Ratio
The relationship between potential profit and potential loss on each trade.
Minimum 1:1 ratio
Target 2:1 or better
Probability adjustment
Common Risk Management Mistakes
Over-leveraging
Using too much capital per trade or excessive margin, leading to large losses that can wipe out accounts.
Solution: 1-2% risk per tradeUse position sizing formulas
No Stop Losses
Failing to set stop losses or moving them further away when trades go against you.
Always set stops before entryNever move stops against you
Emotional Decision Making
Letting fear and greed drive trading decisions instead of following predetermined rules.
Follow your trading planUse mechanical systems
Conclusion
Risk management is the cornerstone of successful trading. It’s not about avoiding risk entirely, but about managing it intelligently to preserve capital and allow for consistent profitability over time. Key takeaways:- Never risk more than you can afford to lose
- Use position sizing formulas consistently
- Always set stop losses before entering trades
- Monitor portfolio heat and correlation
- Keep detailed records of all trades