1. Position sizing
Decide how many shares, contracts, or units to trade based on your account size, entry price, and planned exit.
TRADING EDUCATION · RISK MANAGEMENT
Protect your capital before pursuing profits.
Risk management helps traders plan how much they are willing to lose, make consistent decisions, and avoid putting too much capital at risk on a single trade.
No risk management method eliminates trading risk or guarantees profits. You can lose some or all of the money you invest.
THE FOUNDATIONS
What is risk management?
Risk management is the process of identifying potential losses and deciding how to limit your exposure before entering a trade. Instead of focusing only on how much you could earn, you also consider how much you could lose.
A trading plan should define your entry conditions, exit conditions, position size, and the amount of capital you are prepared to risk.
Remember the priority
Protecting your trading capital helps you avoid letting one poorly planned trade cause disproportionate damage to your account.
2. Stop-loss orders
Learn how stop-loss orders can help manage a planned exit. Execution prices may differ from the stop price, especially in fast-moving or illiquid markets.
3. Risk-to-reward ratio
Compare your planned potential loss with your planned potential gain before deciding whether a trade fits your strategy.
4. Understand leverage
Borrowed exposure can magnify losses as well as gains. Understand margin requirements and the possibility of losing more than you initially expect.
5. Trading rules
Set clear limits for trade size, daily losses, and the conditions under which you will stop trading and review your decisions.
A simple position-sizing example
Imagine a hypothetical trading account of $5,000. A trader chooses to risk 1% of the account on one trade.
Calculate the planned risk
Account balance: $5,000
Planned risk: 1%
Maximum planned loss: $50
If the entry price is $25 and the planned stop price is $24, the difference is $1 per share. A position of 50 shares represents $50 of planned price risk, excluding fees and slippage.
This is an educational example, not a recommendation to risk 1% on every trade. A stop-loss does not guarantee that the final loss will stay within the planned amount.
Build a risk management checklist
- Know why you are entering the trade.
- Define your exit before entering.
- Calculate your position size and planned loss.
- Consider fees, slippage, leverage, and market volatility.
- Avoid risking money you cannot afford to lose.
- Review your results and follow your trading plan.
Continue learning
Risk management works best alongside market knowledge and emotional discipline.
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