Mastering Risk Management in Trading
Risk management is the foundation of successful trading. Without proper risk controls, even the best trading strategy can lead to significant losses.
Position Sizing Fundamentals
Position sizing is your first line of defense in risk management. Your position size should be calculated based on your account size, the stock's volatility, and your maximum allowable risk per trade.
Formula: Position Size = (Account Size × Risk Per Trade) ÷ (Entry Price - Stop Loss)
Stop Loss Strategy
Stop losses are crucial for protecting your capital. They should be placed at technically significant levels where your trade thesis would be invalidated, not arbitrary price points.
Risk-Reward Ratios
A proper risk-reward ratio ensures that your winning trades more than compensate for your losses. Aim for a minimum risk-reward ratio of 1:2, meaning your potential profit should be at least twice your potential loss.