Risk Management Basics
Risk management is the most important skill in trading. Without it, even the best strategy will eventually fail.
The 1-2% Rule
Never risk more than 1-2% of your account on a single trade.
Example:- Account Size: $10,000
- Max Risk (2%): $200 per trade
Calculating Position Size
Position Size = (Account Risk $) / (Stop Loss in Pips x Pip Value)
Example:- Account: $10,000
- Risk: 1% = $100
- Stop Loss: 50 pips
- For EUR/USD: $100 / (50 x $0.10) = 20 micro lots
Stop-Loss Placement
Always use a stop-loss. Place it:
- Below support for long trades
- Above resistance for short trades
- Beyond recent swing highs/lows
Risk-to-Reward Ratio
Aim for minimum 1:2 risk-to-reward
- Risk: 50 pips
- Target: 100 pips (2x the risk)
With 1:2 ratio, you can be wrong 50% of the time and still be profitable!
Key Principles
- Never average down on losing trades
- Cut losses quickly, let winners run
- Preserve capital - you can't trade without it
- Don't overtrade - quality over quantity
- Keep a trading journal - learn from every trade
Common Mistakes to Avoid
- Trading without stop-loss
- Risking too much per trade
- Moving stop-loss further away
- Overleveraging
- Emotional trading after losses
Lesson Discussion