Define risk in money, not confidence
Choose a maximum amount or percentage that can be lost if the stop executes. A high-confidence label does not justify unlimited risk, and multiple correlated trades can behave like one larger position.
Use invalidation to calculate position size
Identify the price that disproves the setup, measure the entry-to-stop distance, and divide the risk budget by risk per unit or contract. Position size should be the output of the plan rather than the starting point.
- Define invalidation before entry
- Include spread, commission, and likely slippage
- Round size down to valid increments
- Skip trades that cannot fit the budget
Control portfolio and session exposure
Set limits for total open risk, correlated markets, daily loss, number of attempts, and maximum drawdown. These controls reduce the chance that several individually small risks become one large uncontrolled loss.
Review decisions with a journal
Record the chart, thesis, entry, invalidation, planned risk, execution, outcome in R, and lesson. Review process adherence separately from profit because a good decision can lose and a poor decision can occasionally win.
Questions about trading risk management
What is the 1% rule in trading?
It is a guideline that limits planned loss on one trade to about 1% of account equity. It is not suitable for everyone and does not prevent slippage or gaps.
What is R in trading?
One R represents the initial planned money risk. A $100 risk losing $100 is -1R; gaining $200 is +2R before adjustments.
Does a stop loss guarantee the maximum loss?
No. Gaps, slippage, liquidity, order behavior, and platform failure can produce a different result.
How many trades can be open at once?
That depends on total and correlated exposure. Evaluate combined worst-case risk rather than counting trades alone.