Level 2 - Risk management

Risk management

Learn position size, stop-loss distance and capital-at-risk basics.

Risk comes first

Risk management decides how much you can lose before you enter a trade. A common beginner framework is to risk a small percentage of the account on one idea. This keeps one trade from damaging the entire learning process.

Position size

Position size connects account risk to the distance between entry and stop-loss. If the stop is far away, the position must usually be smaller. If the stop is close, the position can be larger, but it may also be easier to get stopped out by normal noise.

Risk-to-reward

Risk-to-reward compares the amount you are prepared to lose with the amount you are aiming to make. It does not predict the future. It helps you decide whether a setup is worth considering before emotions take over.

Practical example

With EUR 1,000 and 1% risk, the planned maximum loss is EUR 10 before fees and slippage. If entry is EUR 100 and stop-loss is EUR 95, the loss per unit is EUR 5, so the estimated position size is 2 units.

Important terms

Account balanceRisk percentStop-lossPosition sizeRisk-to-reward
A stop-loss can execute at a worse price in fast markets, and leverage can magnify losses.

Lesson quiz

Answer all 3 questions, then submit. You need 3/3 correct to unlock the next lesson.

With EUR 1,000 and 1% risk, what is the planned maximum loss before fees?
If the stop-loss is farther away, should position size usually be reviewed?
Does risk-to-reward predict the future?