Risk management involves controlling and mitigating potential losses while maximizing profits.

It's not just about using stop losses; it encompasses everything from position sizing to

maintaining a psychological edge and controlling emotions.

Core Concepts of Risk Management

1. Position Sizing:

◦ Position sizing is about determining how much of your trading capital to risk on

each trade. This depends on your risk tolerance, the size of your account, and the

volatility of the asset you’re trading.

◦ The 1-2% Rule: A popular rule among traders is to risk only 1-2% of your total

capital on each trade. This ensures that a string of losses won’t significantly

impact your overall account balance.

◦ To calculate position size, you’ll need to know:

▪ Risk per trade (usually a percentage of your account).

▪ Stop loss distance (how far your stop is from your entry).

▪ Account size.

2. Example: If you have a $10,000 account, risking 1% per trade means risking $100 per

trade. If your stop loss is 50 pips, you would calculate the position size to ensure that a

50-pip move results in no more than a $100 loss.

3. Risk-Reward Ratio:

◦ The risk-reward ratio is the potential profit compared to the potential loss in a