Financial markets are uncertain. Technical and fundamental analysis can inform a decision, but no one can predict market prices with complete accuracy. Risk management focuses on the parts of a trade a trader can plan, including potential loss, position size and review.
Start with uncertainty and volatility
Prices respond to many factors, including economic news, political events and investor sentiment. Markets can be relatively quiet or highly volatile. A strategy that worked in one set of conditions may not work in another, so a trading plan should account for possible losses.
Set a stop loss and define risk per trade
A stop-loss level is a price at which a trader plans to exit if the market moves against the position. It can help limit a planned loss, although execution and price movement may differ from expectations.
The article uses 1–2% of total capital as an illustrative risk limit for one trade. This is not suitable for everyone and does not guarantee against loss.
Calculate position size before entering
Position size is the quantity opened in a trade. A simplified calculation is: amount you are willing to risk ÷ distance between the entry price and the stop-loss price. The result must be interpreted using the instrument's contract size, point value, currency and trading rules. A stop loss does not remove market or execution risk.
Review the plan and keep records
Record the entry and exit, the result and the reason for each decision. Review those records to identify mistakes and see whether a strategy fits the conditions in which it is being used. Adjust a plan when circumstances change, but avoid increasing risk simply to recover a loss.
- Markets are uncertain and cannot be predicted with certainty.
- Define a planned loss before opening a position.
- Calculate position size from the chosen risk and stop distance.
- Accept that losses happen and protect capital for the long term.
- Review the trading record; no strategy guarantees a profit.
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