Lesson 5 of 74 minchecked
Risk management in trading: size, stop and the losing streak
GoalAfter this lesson you can set a position size, place a stop order, and manage a series of losses.
Trading puts your money at risk. This lesson shows how to control that risk with position size, stop orders, and a plan for losing streaks.
Decide the most you will lose on one trade before you enter. A common guide for beginners is one or two parts out of a hundred of your account. This is your risk per trade.
Your position size must match that risk. If your stop is far from your entry, your position must be smaller. If your stop is close, your position can be larger.
Do not risk more after a loss to win it back. That is how small losses become large ones.
Stop: the order that limits loss
A stop order closes your trade at a price you choose. It turns an open loss into a known loss. Place it when you enter the trade, not later.
Set the stop where your idea is wrong, not where your money feels comfortable. If the market must move too far for your stop, skip the trade.
Some traders also use a take-profit order to close at a target. This is optional. The stop is the part you should not skip.
Losing streaks: plan for them
Even with good risk control, you can lose several trades in a row. This is normal. A losing streak does not mean your method is broken.
Set a daily or weekly loss limit. When you reach it, stop trading for that period. This protects your account and your mind.
Keep a simple record of each trade: entry, stop, size, and result. The record shows if your losses come from bad luck or poor choices.
Risk and return: they move together
Higher possible return always comes with higher risk. There is no safe way to get large gains quickly. Be careful with anyone who says otherwise.
Software can help you calculate size and track your risk. It cannot remove risk. You still make the decisions.
Good risk management is boring. It is also what keeps you in the market long enough to learn.
Many beginners move their stop further away when price moves against them. This turns a small planned loss into a large one.
Words with a dotted underline open their explanation in the glossary.
Check your understanding
Answer in your head first, then open the answer.
What should you decide before you enter a trade?
AnswerDecide the most you will lose on that trade. Then set your position size and stop order to match that amount.
Why should you place a stop order when you enter?
AnswerIt limits your loss to a known amount. Waiting can lead to a larger loss.
What should you do after several losses in a row?
AnswerFollow your loss limit and stop for the period. Review your trade record before you continue.