Risk Management

Everything later in this book is about finding good trades. This module is about surviving long enough for “good trades” to actually compound into a career. Before every single entry you should be able to answer three questions: how much am I risking, where is my stop if I’m wrong, and what is my rule for taking this trade in the first place?

The 1–2% Rule, and Why It’s Non-Negotiable

Risk no more than 1–2% of your total account on any single trade. This isn’t a conservative suggestion — it’s math. Losses and the gains required to recover from them are not symmetrical. A 10% loss only needs an 11% gain to break even. A 50% loss needs a 100% gain just to get back to where you started. Blow through several oversized losses in a row — which happens to every trader eventually — and you can dig a hole that takes years, not weeks, to climb out of.

Size the Trade Before You Take It

Capping risk at 1–2% keeps any single bad decision from becoming an account-ending one. In practice that means the stop decides the share count — not the other way round. Run the numbers here before you send the order:

Position Sizing by Conviction

Not every trade deserves the same size, even within that ceiling. We size in four tiers based on how much the setup, the market regime, and our own read on the name all line up. Position size should scale with conviction, not with how badly you want to be right.

Capital Preservation vs. Being Right

New traders optimize for being right. Experienced traders optimize for staying in the game. Those are not the same goal, and chasing the first one is what wrecks accounts. You will be wrong on a meaningful percentage of your trades no matter how good your process gets — that’s not a flaw to eliminate, it’s a built-in feature of trading probabilistically. What actually determines whether you’re still trading in three years is whether your losses stay small and defined every single time, so no individual mistake can take you out of the game.

What a Process Is Actually Worth

There is a number that ties this module to the last one. Expectancy is what you make, on average, per trade — measured in units of risk rather than dollars. It is the arithmetic behind “process over prediction”: a process with positive expectancy makes money over a large enough sample regardless of how any individual trade turns out, and a process with negative expectancy loses money no matter how good the individual reads feel.

Stops & Profit-Taking

Your stop loss is decided before you enter, not after price starts moving against you. On the profit side, we trim at least a quarter of the position at roughly a 25% gain. That single habit locks in real progress on every winner while still leaving enough size on for the rest of the move to play out, which keeps your results consistent instead of chasing an all-or-nothing outcome on every trade.

Build Your Own Rules

Over time, your journal from Module One will start showing you patterns in your own behavior — sessions you trade poorly, setups you consistently misjudge, position sizes that keep you up at night. Write those observations down as rules and hold yourself to them. A few of ours, as an example of the specificity to aim for:

• No trading in the first ten minutes after the open — or size down significantly if you do.
• Reduce size across the board when the broad market is choppy or extended.
• Enter every session with a plan already written: names, levels, and what you’ll do at each one.

Every $1,000 you lose is $1,000 you now need to earn back, plus whatever it cost you in opportunity along the way.
Trade like that math is always running in the background — because it is.