Risk Management
Protect your capital with proper risk management. This guide covers the essential rules every trader should follow.
The 1% Rule
Never risk more than 1-2% of your capital on a single trade.
Why It Matters
Example with 2% risk: With a $10,000 account, you risk $200 per trade (2%). After 10 losing trades, you still have $8,000 remaining (20% drawdown) and capital to recover.
Example with 10% risk: With a $10,000 account, you risk $1,000 per trade (10%). After 10 losing trades, you have $0 remaining and your account is blown.
How to Calculate
Formula: Position Size = (Account Size × Risk %) / Stop Loss %
Example: With a $10,000 account and 2% risk ($200), if your stop loss is 2% from entry, your position size is $10,000. If your stop loss is 4% from entry, your position size is $5,000 (half the size).
Stop Losses
Always use stop losses. No exceptions.
Types of Stop Losses
Fixed Percentage: Simple and consistent, set 2-3% below entry. Good for beginners as it's easy to understand and implement.
Volatility-Based: Based on Average True Range (ATR), these stops are wider in volatile markets and adapt to changing market conditions automatically.
Technical Stops: Placed below support levels or recent swing lows, these stops are based on chart patterns and key technical levels.
Stop Loss Mistakes
Too Tight: Getting stopped out by normal market volatility means you never give your trade room to work. Solution: Use ATR-based stops or wider percentage stops.
Too Wide: Setting stops too wide risks too much capital and leads to large losses when you're wrong. Solution: Reduce position size instead of widening stops.
Moving Stops Wider: Hoping a losing trade will recover by moving stops wider defeats the purpose of risk management. Solution: Accept the loss and move on to the next opportunity.
Position Sizing
Don't put all your capital in one trade.
Diversification Rules
Maximum Per Trade: Limit each position to 10-20% of your capital, even if your risk is only 1-2%. This prevents over-concentration in any single trade.
Total Exposure: Keep maximum 50-60% of your capital in all positions combined. Maintain a cash reserve for new opportunities and protect against correlated market moves.
Per Strategy: Don't run 10 momentum bots simultaneously. Diversify across different strategy types to ensure uncorrelated approaches to the market.
Daily Loss Limits
Stop trading for the day after losing X%.
Recommended Limits
Beginner: 3-5% daily loss limit Intermediate: 5-7% daily loss limit Advanced: 7-10% daily loss limit
Why It Works
Daily loss limits prevent revenge trading, stop emotional decision-making, give you time to reassess your approach, and protect your capital from catastrophic losses.
QuantsEdge Implementation: Set your daily loss limit in Settings → Risk Management. Trading automatically pauses when your limit is reached.
Leverage Guidelines
Leverage amplifies both gains and losses.
Conservative Approach
Beginners: 1x (no leverage) Intermediate: 2-3x maximum Advanced: 5x maximum Experts Only: 10x+
Leverage Reality Check
At 10x leverage: A 10% price move against you equals 100% loss. Normal market volatility can liquidate you, and one bad trade ends your account.
At 2x leverage: You need a 50% price move to get liquidated. This provides much more breathing room while still getting the benefit of leverage.
Risk-Reward Ratios
Only take trades where potential profit exceeds potential loss.
Minimum Acceptable
1:1.5 - Okay for high win rate strategies 1:2 - Good baseline for most traders 1:3 - Excellent risk-reward ratio
Example
Entry: $50,000 Stop Loss: $49,000 (2% = $1,000 risk) Take Profit: $52,000 (4% = $2,000 reward) Risk-Reward: 1:2 ✓
Why It Matters: With a 1:2 risk-reward ratio, you only need a 40% win rate to break even.
Drawdown Management
Maximum tolerable decline from peak.
Setting Limits
Conservative: 15% maximum drawdown Moderate: 20-25% maximum drawdown Aggressive: 30% maximum drawdown
When Drawdown Hits
Stop all trading immediately
Review what went wrong
Adjust strategy or parameters
Resume with smaller position sizes
Scale back up gradually
Never: Increase position size to "make it back," keep trading hoping for recovery, or ignore the warning signs.
Correlation Risk
Don't run multiple bots trading the same signal.
Bad Portfolio Example
Running 5 momentum bots on different pairs isn't true diversification. They all trigger at the same time in trending markets and all lose together in ranging markets, despite trading different pairs.
Good Portfolio Example
A well-diversified portfolio includes 2 momentum bots (for trends), 2 mean reversion bots (for ranges), and 1 breakout bot (for volatility). Different strategies provide real diversification.
Capital Allocation
How to split your trading capital.
Conservative Model
60% mean reversion strategies, 30% momentum strategies, 10% cash reserve
Balanced Model
40% mean reversion, 40% momentum, 10% breakout, 10% cash reserve
Aggressive Model
30% mean reversion, 40% momentum, 20% breakout, 10% cash reserve
Always maintain a cash reserve for new opportunities and emergency situations.
Psychology of Risk
Emotional Discipline
Accept Losses: Losses are part of trading. Focus on your process, not individual results. No single trade should matter more than your overall strategy.
Avoid Revenge Trading: Don't increase position sizes after losses, don't abandon your plan emotionally, and take a break after a bad trading day.
Stay Humble: One winning streak doesn't make you an expert. Markets change constantly, so always respect risk and stay humble.
Warning Signs
Stop trading if you experience any of these warning signs:
Increasing position sizes impulsively
Trading without stop losses
Checking positions every 5 minutes
Can't sleep due to trading stress
Hiding trading activities from family or friends
Quick Reference
Essential Rules
Risk 1-2% per trade maximum
Always use stop losses
Never use more than 5x leverage (beginners: 1x)
Set daily loss limits (5-7%)
Maintain 1:2 minimum risk-reward
Diversify across strategies
Keep cash reserve (10%+)
Pre-Trade Checklist
Before entering any trade, ensure:
Stop loss is set
Position size is appropriate (1-2% risk)
Risk-reward is at least 1:2
You understand why you're entering the trade
You're not over-concentrated in one direction
You're within your daily loss limit
You're emotionally calm and rational
Common Mistakes
Over-Leveraging: Using maximum leverage available. Start with 1x leverage and work your way up as you gain experience.
No Stop Losses: Hoping losing trades will reverse without setting stops. Always set stop losses before entering any trade.
Revenge Trading: Doubling down after losses to try to make it back. Take breaks instead and stick to your plan.
Position Too Large: Risking 10%+ of your capital per trade. Stick to 1-2% maximum risk per trade.
Correlated Positions: Running the same strategy multiple times across different pairs. Diversify across different strategy types instead.
Next Steps
Understand Position Sizing: Learn advanced position sizing techniques to optimize your risk management. Position Sizing Guide →
Configure Your Bots: Set risk parameters correctly in your trading bots to ensure they follow your risk management rules. Bot Configuration →
Monitor Performance: Track risk metrics over time to ensure your risk management is working effectively. Performance Analysis →
Risk management is what separates long-term successful traders from those who blow up. Protect your capital first, profits second.
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