Your setup gets you into a trade. Risk management decides whether you're still trading in a year. Every professional cares more about this lesson than about any pattern in this library.
Think in R, not dollars
R is the amount you risk on a trade, from entry to stop. Lose at your stop = −1R. Win at a target twice as far = +2R.
| Win rate | Reward : Risk | After 100 trades |
|---|---|---|
| 60% | 1 : 1 | +20R |
| 40% | 2 : 1 | +20R |
| 30% | 3 : 1 | +20R |
| 50% | 0.8 : 1 | −10R |
The 1% rule
Risk 0.5–1% of your account per trade. Ten losses in a row (it happens) costs ~10%, which you can recover from. At 5% per trade the same streak costs ~40%, and you'd need +67% just to break even.
Position size formula
$10,000 × 1% = $100 risk. Entry 100.00, stop 99.50 → distance 0.50 → size = 200 units.
Place the stop where your idea is proven wrong, then size the position. Never move the stop further away to "give it room".
Hard rules
- A stop on every trade, before entry.
- Max 2–3% total loss per day, then stop.
- No adding to losing trades.
- Stops only move toward profit.
Drill
Run one backtester session at 1% risk and 2:1 RR for 20 trades, then one at 1:1. Compare Net R and Max drawdown. The backtester sizes positions for you so you can feel how R works.