Risk Management: The Key to Long-Term Trading Success

Why Risk Management Matters

95% of traders lose money not because of bad strategies, but due to poor risk management. Protecting your capital is more important than making profits.

The 1-2% Rule

Never risk more than 1-2% of your trading capital on a single trade. If you have $10,000, risk only $100-200 per trade. This allows you to survive losing streaks.

Position Sizing

Calculate position size based on your stop-loss distance and risk amount. Use this formula:

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

Stop-Loss Strategies

Fixed Stop-Loss: Set at a specific price level based on technical analysis.

Trailing Stop-Loss: Moves with price to lock in profits.

Time-Based Stop: Exit after a predetermined time if target isn't reached.

Risk-Reward Ratio

Always aim for at least 1:2 risk-reward. Risk $100 to make $200. This allows you to be profitable even with 40% win rate.

Diversification

Don't put all eggs in one basket. Trade multiple assets: forex pairs, crypto, gold, commodities. But don't over-diversify - focus on quality.

Common Risk Management Mistakes

• Revenge trading after losses


• Moving stop-losses to avoid being stopped out


• Over-leveraging


• Not having a trading plan


• Trading based on emotions

Psychology and Discipline

Stick to your risk management rules even during winning streaks. Discipline is what separates professional traders from gamblers.