Risk & process
Risk Management
Rules that protect capital: stops, total exposure limits, and positive expectancy habits.
What it is
Risk management is the process of identifying, assessing, and controlling risks in trading. It includes position sizing, stop losses, risk/reward ratios, diversification, and overall account risk limits. The goal is to protect capital while allowing for growth.
Why it matters
Risk management is arguably more important than entry signals. Even the best traders can have losing streaks, but proper risk management ensures they survive to trade another day. Without good risk management, one bad trade can wipe out weeks or months of gains.
How traders use it
Set clear risk rules: risk only 1-2% per trade, use stop losses on every position, maintain a positive risk/reward ratio (at least 1:2), don't risk more than 6% of your account at once across all positions, and review your risk management regularly.
Example
A trader with a $100,000 account might risk 1% ($1,000) per trade, use stop losses 2% away from entry, only take trades with at least 2:1 risk/reward, and never have more than 3 positions open at once (max 3% total risk).
Deeper context
Process risk (breaking your rules) often destroys accounts faster than market risk. Write rules down, journal exceptions, and treat PositionAlpha outputs as inputs to a risk-framed plan. Educational tools do not replace stop placement or margin awareness in futures.
Related terms
Position Sizing, Stop Loss, Risk/Reward, Diversification