Risk management isn't about avoiding losses — it's about surviving them. Most traders focus on finding winning trades. Professionals focus on not losing everything. This guide covers the fundamental principles that separate traders who last from traders who blow up.

The difference between a profitable trader and a losing trader isn't win rate. It's risk management. You can have a 40% win rate and still be profitable if you manage risk correctly. You can have a 60% win rate and still blow up if you don't.

What is risk management?

Risk management is the process of identifying, assessing, and controlling risks to protect your trading capital. It's not about eliminating risk — that's impossible. It's about managing risk so you can survive long enough to be profitable.

Good risk management means:

• You know exactly how much you can lose on each trade
• You have a plan for when things go wrong
• You can survive a string of losses without blowing up
• You protect your capital so you can keep trading

The core principles

1. Risk a fixed percentage per trade

Never risk more than 1-2% of your account on a single trade. This is the golden rule. If you have $10,000, never risk more than $100-200 per trade.

Why this matters: If you risk 1% per trade, you can lose 20 trades in a row and still have 82% of your account. If you risk 5% per trade, 20 losses in a row wipes you out.

2. Use stop losses on every trade

Every trade needs a stop loss. No exceptions. If you don't know where you'll exit if you're wrong, you shouldn't enter.

Stop losses should be:

• Based on technical levels (support, resistance, chart patterns)
• Wide enough to account for volatility
• Set before entering the trade
• Never moved to give the trade "more room"

3. Limit total exposure

Don't put all your capital into one trade or one asset. Diversify your risk across multiple positions, but be aware of correlation.

Correlation matters: If you have 5 positions that all move together, you're not taking 5 separate 1% risks — you're taking one 5% risk. Use our Correlation Risk Calculator to see your effective exposure.

Total capital at risk: Calculate your total exposure across all positions. If you have $10,000 and 5 positions each risking 1%, your total risk is 5% — but only if they're uncorrelated. If they're correlated, it's higher.

4. Know your maximum drawdown

Drawdown is the peak-to-trough decline in your account value. A 30% drawdown means you need a 43% recovery just to break even.

Recovery math: If you lose 50%, you need a 100% gain to recover. This asymmetry is why drawdowns are so dangerous.

5. Have a maximum drawdown limit

Set a hard limit on how much drawdown you'll accept. Common limits are 20-30% of account value. If you hit this limit, stop trading and reassess.

Why this matters: If you're down 30%, you're not thinking clearly. You're emotional. You're likely to take bigger risks to "make it back." This is when most traders blow up.

6. Position size based on risk, not confidence

Your position size should be based on your risk percentage and stop distance, not how confident you feel about the trade. Confidence doesn't change the math.

If you're more confident, you might:

• Use a tighter stop (but this increases position size for the same risk)
• Take the trade (but still risk the same percentage)
• Not take the trade if you're not confident

But you should never increase your risk percentage just because you're confident. That's how you blow up.

Common risk management mistakes

Mistake 1: No stop loss

Trading without a stop loss is gambling. You're hoping price will come back, but it might not. Without a stop, one bad trade can wipe you out.

Solution: Always use a stop loss. Set it before entering the trade. Never remove it or move it further away.

Mistake 2: Risking too much per trade

Risking 5%+ per trade might work for a while, but one bad streak will wipe you out. The math doesn't lie.

Solution: Risk 1-2% per trade maximum. This allows you to survive losing streaks and keep trading.

Mistake 3: Averaging down

Adding to a losing position to "lower your average" is dangerous. You're increasing your risk on a trade that's already going against you.

Solution: If your stop gets hit, you were wrong. Don't add to losing positions. Cut your losses and move on.

Mistake 4: Not accounting for correlation

Holding multiple correlated positions increases your actual risk. If BTC and ETH are 80% correlated, holding both is like holding one larger position.

Solution: Use our Correlation Risk Calculator to see your effective exposure. Reduce position sizes when holding correlated assets.

Mistake 5: No maximum drawdown limit

Without a drawdown limit, you can keep trading through a losing streak until you blow up. Most traders don't realize they're in trouble until it's too late.

Solution: Set a hard limit (20-30%). If you hit it, stop trading. Reassess your strategy.

Risk management checklist

Key takeaways

Frequently asked questions

What's the difference between risk management and position sizing?

Position sizing is part of risk management. Risk management is the broader framework — it includes position sizing, stop losses, drawdown limits, and exposure management. Position sizing is the specific calculation of how much to risk per trade.

Should I risk the same percentage on every trade?

Yes. Consistency is key. Your risk percentage should be the same regardless of how confident you feel. If you're more confident, adjust your stop distance or position size, not your risk percentage.

What if I have a small account?

Small accounts face challenges with fees and slippage, but the principles are the same. Risk 1-2% per trade. If your account is very small (under $1,000), consider building it up before trading, or use very small position sizes that account for fees.

How do I know if my risk management is working?

If you can survive losing streaks without blowing up, your risk management is working. If you're consistently losing more than you can afford, or if you're hitting your drawdown limit regularly, you need to reassess.

Should I use different risk percentages for different strategies?

Some traders use different risk percentages for different strategies (e.g., 1% for swing trades, 0.5% for scalping). This is acceptable as long as you're consistent within each strategy type.

Tools to help

Use our Risk of Ruin Estimator to see how your risk per trade affects your survival probability. Our Capital at Risk Calculator helps you see total exposure across multiple positions, and our Correlation Risk Calculator shows how correlation affects your effective exposure.