Risk Management Basics: Decide What You Can Lose First

Many new traders start by asking how much they could win. A more useful first question is how much they are willing to lose.

Define risk before entry

Decide the most you will risk on one idea as a small share of your account, and decide where the idea is proven wrong. If the trade only makes sense with a very distant exit, the idea may be too large for your account.

Stops are part of the plan

An exit level chosen in advance is a rule, not a hope. Moving it further away after entry to avoid a loss is one of the most common ways small losses become large ones.

Compare risk with potential reward

Before entering, compare the distance to your exit with the distance to your target. This does not predict what will happen. It helps you avoid ideas where the possible gain does not justify the risk.

Limit the damage of a bad day

Many traders set a daily or weekly limit and stop when it is reached. Having that line in writing makes it easier to respect.

Trading involves substantial risk of loss. This article is educational only.