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Risk Management & Position Sizing (The Only Trading Edge That Scales)

If you want “consistent profits,” start here. Most traders don’t lose because their entry is terrible — they lose because their risk is uncontrolled.

Published: February 14, 2026 • Last updated: February 14, 2026 • Reading time: ~10 minutes
Position sizing equation based on account, risk, and stop size.
Risk first. Then position size. Then trade.
Pillar guide • Core framework page. See all pillars: Trading pillar guides.
Definition (quick)

Risk management is the system you use to survive variance: define invalidation, size your position from that stop, and keep risk consistent so one bad day can’t erase months of progress.

Quick steps (copy/paste)
  1. Pick a repeatable risk per trade (example: 0.5%–1%).
  2. Place the stop where the idea is wrong (not where it “feels tight”).
  3. Calculate size from risk ÷ stop distance.
  4. Reduce size if volatility expands; don’t “revenge size.”
Non-negotiable: choose risk per trade before you enter. If you size based on emotion, you’ll blow up eventually.
Reality check: no strategy guarantees wins, but disciplined risk is how you survive variance and compound.

1) Pick a risk per trade you can repeat

You don’t need a perfect number. You need a consistent number. Many traders sit around 0.25%–2% depending on volatility and strategy. Consistency is the edge.

2) Place stops where the idea is wrong

A stop loss should sit beyond a level that changes the story:

  • beyond a support/resistance zone
  • beyond a swing high/low in structure
  • beyond the wick that swept liquidity (if trading a sweep)

If the stop is “because I want a tight stop,” it’s not logical—it's wishful.

3) Calculate position size (simple)

Basic formula:

Position size = (Account × Risk per trade) ÷ Stop size

Example: $10,000 account, 1% risk ($100), 50-point stop → size = $100 ÷ 50 = 2 units (adjust units per instrument).

Three account-killers (avoid these)

  • Revenge sizing: increasing size after a loss to “get it back.”
  • Moving stops emotionally: widening the stop because price is close.
  • Overtrading: taking low-quality setups because you feel behind.

A prompt for AI risk planning

Given this setup, help me define risk clearly.

1) Where is the logical invalidation level (stop) and why?
2) What is the stop distance from entry?
3) If my account is [X] and risk per trade is [Y%], what is position size?
4) What is the main mistake traders make with this setup?

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