Risk management is the single biggest difference between traders who last and those who blow up. You cannot control whether a trade wins — you can control how much it costs when it loses.
Think in R
R is your risk on a trade: the distance from entry to stop, times your position size. Every outcome is then measured in multiples of R. A win of twice your risk is +2R; a full stop-out is −1R. Thinking in R makes results comparable regardless of account size.
The 1% rule
Risk no more than ~1% of your account on a single trade. On a $10,000 account that is $100 of risk (your 1R). At 1% risk you can take a long string of losses and still have most of your account — enough to recover.
| Consecutive losses | Account remaining (1% risk) |
|---|---|
| 5 | ~95% |
| 10 | ~90% |
| 20 | ~82% |
Position sizing
Decide your stop first, then size the position to fit your risk — never the other way around.
Example: $10,000 account, 1% risk = $100. Entry $50, stop $48 → risk per share $2 → buy 50 shares.
Expectancy
A system is profitable if its expectancy — average profit per dollar risked — is positive.
Example: win 40% at +2R, lose 60% at −1R → (0.40 × 2) − (0.60 × 1) = +0.20R per trade. You can win less than half your trades and still come out well ahead if winners are larger than losers.
Favor setups offering at least 2R of reward for 1R of risk. With a 2:1 payoff you only need to be right about a third of the time to break even.
Beyond the single trade
- Daily / weekly loss limits — stop trading after, say, −3R in a day. It protects you from spiraling.
- Correlation — five trades in the same sector is really one big trade. Size accordingly.
A string of small, controlled losses is survivable. One oversized loss is not. Protect the downside and the upside takes care of itself.
Next: the discipline to actually follow these rules — Trading Psychology.