Risk Management

Risk management questions traders ask most

• What is risk management in trading?

  Risk management is the set of rules you use to control downside on every trade and across your account. It covers how you size positions, where you exit when you’re wrong, and how you cap losses during drawdowns. Good risk management keeps your results stable enough for any trading edge to show up over time. 

• How much should you risk per trade?

  Most traders choose a small, fixed amount, often a percentage of account equity, so no single trade can meaningfully damage the account. The “right” number depends on your strategy volatility, win rate, and how often you trade, but the core principle is consistency. If your risk changes based on emotion, your performance becomes impossible to evaluate. 

• What is the 1% rule in trading, and does it work?

  The 1% rule is a guideline that limits the loss on any single trade to about 1% of your account. It can work as a simple guardrail, especially for newer traders, because it reduces the chance of catastrophic drawdowns. It’s not a magic number, though some strategies require less, and some experienced traders use different limits based on volatility and frequency. 

• How do you place a stop-loss correctly?

  A correct stop-loss is placed at the point where your trade idea is invalidated, not at an arbitrary distance. That level might be beyond a swing high/low, beyond a key level, or beyond the structure your setup depends on. If you can’t explain “why the stop is there,” it’s usually not a rule-based stop. 

• What is position sizing and how do you calculate it?

  Position sizing is choosing trade size so the money you risk stays consistent even when stop distances change.

  A common method is: Position size = (Account risk per trade) ÷ (Stop distance in price) (adjust for contract size/pip value where needed). This keeps your risk controlled across different markets and volatility conditions. 

• What is reward-to-risk ratio in trading?

  Reward-to-risk (R:R) compares your potential profit to your potential loss on a trade. If you risk 50 USD to make 100 USD, that’s a 2:1 reward-to-risk ratio. It’s a planning tool that helps you avoid trades where the payoff doesn’t justify the downside. 

• What reward-to-risk ratio is “good” for a trading strategy?

  A “good” R:R depends on how often you win and how your winners/losers behave in real trading (including fees and slippage). Many robust approaches aim for trades that offer at least 1.5R–3R potential. But high R:R typically result in lower hit rates for many strategies. What matters is the combination of win rate and average R per trade. 

• Can you be profitable with a low win rate?

  Yes, profitability depends on the relationship between your average win and average loss. A strategy can win less than 50% of the time and still make money if winners are (significantly) larger than losers. This is why reward-to-risk and keeping losses contained are so important. 

• How do you calculate expectancy in trading?

  Expectancy estimates your average profit per trade and is commonly calculated as:

  Expectancy = (Win rate × Average win) − (Loss rate × Average loss).

  You can calculate it in R-multiples (e.g., average R gained per trade) to compare performance across different instruments and sizing. 

• What is maximum drawdown and why does it matter?

  Maximum drawdown is the largest peak-to-trough decline in your account equity over a period. It matters because it tells you how severe losing periods can get and whether you can realistically stick with the strategy. Lower drawdowns usually mean better survivability and more consistent execution. 

• What are daily loss limits and how should you set them?

  A daily loss limit is a predefined cutoff that stops you from digging a deeper hole on bad days. Traders often set it as a multiple of their normal risk (for example, stop trading after 2–3 losing trades or after a fixed daily dollar/percent limit). The goal is to protect decision quality as much as account equity. 

• How do you manage risk when trading multiple positions at once?

  You manage portfolio risk by tracking total open risk (the sum of worst-case losses if stops are hit) rather than looking at each trade in isolation. You also need to account for correlation because multiple positions in similar instruments can behave like one oversized bet. Many traders cap total exposure (e.g., max open risk of 2R–4R across all trades). 

• What are the most common risk management mistakes traders make?

  Common mistakes include oversizing after wins or losses, widening stops to avoid taking a loss, and entering trades without a defined exit plan. Another frequent issue is “hidden leverage” from holding too many correlated positions at once. These errors usually don’t show up on a single trade but they show up as unstable equity curves over time.