YOU CAN MAKE MONEY EVEN IF 50% OF YOUR TRADES GO WRONG. LETS UNDERSTAND 🧵👇
1. The Golden Rule: Risk per Trade
Before you decide how much to buy, you must decide how much you are willing to lose. (1/10)
Most professional traders follow the 1% Rule:
Never risk more than 1% of your total account equity on a single trade.
If you have $10,000, you should only be "at risk" of losing $100 if the trade goes south.
Why this matters:
Survival: Even a 10-trade losing streak only knocks off roughly 10% of your account.
Psychology: It’s much easier to stay calm and follow your plan when the potential loss doesn't ruin your month.
2. Calculating Position Size
Position size isn't just a random number ; it’s a calculation based on your Stop Loss.
The formula looks like this:
Position Size = Account Risk /Entry (Price - Stop Lose Price )
Example:
Account: $10,000
Risk (1%): $100
Stock Price: $50
Stop Loss (where you'll exit): $45
(a $5 risk per share)
Calculation:
$100 / $5 = 20 Shares
Even though you have $10,000, you only buy 20 shares ($1,000 worth).
If the stock hits $45, you lose exactly your $100 limit.
3. The Risk/Reward Ratio
Risk management isn't just about defense; it’s about making sure your wins outweigh your losses. A common target is 1:2 or 1:3.
Ratio Result
1:1 You must be right >50% of the time to break even.
1:2 You can be wrong 60% of the time and still make a profit.
1:3 One win wipes out three losses. This is the "Sweet Spot."
4. Diversification & Correlation
Risk management also means looking at your portfolio as a whole.
Sector Risk: If you own 5 different AI stocks, you aren't diversified. You have one big position in "AI."
Correlation: If the whole market drops, most stocks drop together. Keep an eye on how much total exposure you have at any given time.
Pro Tip: Avoid "Revenge Trading." The fastest way to ruin a risk management plan is trying to "win back" a loss by doubling your position size on the next trade. Stick to the math, not the math-ish.