Risk management for traders

Risk is the only thing you control

No participant controls where the market goes next. What a trader does control is how much is at stake when the market moves against them. That is why risk management — not prediction — is the foundation of a durable approach.

Define risk before entry

A common discipline is to decide, before opening any position, the exact price at which the idea is wrong and the position will be closed. The distance to that level, combined with the amount you are willing to lose, determines the position size — not the other way around.

Stop-loss orders make this rule mechanical. Note that in fast or gapping markets, standard stop orders can be filled at a worse price than requested.

The mathematics of drawdown

Losses compound asymmetrically: a 20% drawdown requires a 25% gain to recover, and a 50% drawdown requires a 100% gain. Keeping individual losses small protects the capital base that every future decision depends on.

Behavioural risk

Averaging into losing positions, widening stops, and increasing size after losses are the most common ways accounts are damaged. Writing rules down — and reviewing trades against them — is a simple habit that makes these patterns visible early.