Risk management

Losses hurt more than equal-sized gains help, because of how percentages compound. Lose 10% and you need an 11% gain to recover. Lose 50% and you need a 100% gain just to get back to even. Lose 90% and you need a 900% gain — practically impossible. Deep drawdowns are mathematical quicksand.

This is why protecting capital comes before growing it. The goal of risk management isn't to avoid losses — losses are unavoidable and normal — it's to keep every loss small enough that no single one, and no losing streak, can ever take you out of the game.

The cornerstone rule: never risk more than a small, fixed percentage of your account on a single trade — commonly 1%, and rarely above 2% even for pros. 'Risk' means the amount you lose if your stop is hit, not the size of the position. On a $10,000 account, 1% risk means you lose $100 if you're wrong. Full stop.

Run the streak math. At 1% risk, ten losses in a row costs about 10% — uncomfortable but fully recoverable. At 10% risk per trade, that same ten-loss streak — which will happen to everyone eventually — nearly wipes you out. The percentage you risk per trade quietly determines whether a normal cold streak is a flesh wound or a fatal one.

Here's the key mental flip: your risk per trade is fixed, and your position size is the variable you calculate from it. You decide the dollars you're willing to lose, you find the distance to your stop, and the position size falls out of the formula. Size serves risk, not conviction.

The formula: Position size = (Account × Risk %) ÷ Stop distance. Example: a $10,000 account risking 1% ($100), with a stop $2 below your entry, gives 100 ÷ 2 = 50 shares. If the setup needs a wider $4 stop, you simply buy fewer shares (25) to keep the dollar risk identical. A wider stop never means more risk — it means a smaller position.

Risk management scales up past individual trades. Watch your total open risk: five trades each risking 1% in correlated markets (say, five tech stocks) isn't 1% risk five times — it's effectively one 5% bet, because they'll likely move together. Cap your aggregate and correlated exposure.

Many pros also use a daily or weekly stop-loss for themselves: if they're down a set amount (say 3% on the day), they stop trading entirely. This breaks the doom-loop of revenge trading after losses. Risk management is ultimately about removing the scenarios — over-sizing, over-exposure, tilt — that turn a bad day into a blown account.