Risk 10% of a $10,000 account per trade and 10 losses in a row leave $3,487. Risk 1% and $9,044 is left. The strategy is the same. Only the size changed.
Risk management in trading is deciding, before you enter, how much a trade can cost you, and making sure a losing streak at that size stays survivable. Three numbers carry most of it: what your strategy makes on average, how long its losing streaks run, and what you risk on each trade.
The four lessons on this page teach it with simulations. You add up trades, guess streaks and pick sizes for 100 traders, then watch what happens over hundreds of trades.
What are the rules of risk management in trading?
| Rule | Why | Lesson |
|---|---|---|
| Judge a strategy by its wins and losses together, over hundreds of trades | A strategy that wins 8 in 10 can still lose money, and 10 trades prove nothing | Win rate |
| Plan for long losing streaks | A strategy that wins 3 in 10 loses 10 or more in a row in 58% of runs of 100 trades | Losing streaks |
| Risk 1 to 2% of the account per trade | Ten losses in a row then cost 10 to 18% | How much to risk |
| Size the position from the stop | Position = risk ÷ distance to the stop loss | How much to risk |
| Win more often than your RR needs | At 1:3 you break even at 1 win in 4, and the RR alone is no edge | Risk to reward |
| Never move the stop further away | It raises what one loss costs after you entered | Risk to reward |
To run these numbers on your own trades, use the position size calculator and the risk of ruin calculator.
Why does a losing streak hurt more than it looks?
Getting back takes a bigger percentage than falling did.
| Account loss | Gain needed to get back |
|---|---|
| 10% | +11% |
| 25% | +33% |
| 50% | +100% |
| 65% | +186% |
| 90% | +900% |
In lesson 3, 100 traders run the same strategy. At 10% per trade more than half of them lose half their account at some point. At 1 to 2%, almost none do.
What do the four lessons cover?
| Lesson | What you do | What you learn |
|---|---|---|
| Why a high win rate doesn't make a strategy profitable | Add up 10 trades for two strategies, watch 100 traders | What a strategy is worth, and why 10 trades can't tell you |
| Losing streaks in trading | Guess the longest streak, run 100 trades hundreds of times | How long losing and winning streaks run at each win rate |
| How much to risk per trade | Take 10 losses at your size, size a position, build a strategy in a sandbox | Why 1 to 2% survives, and how the stop sets the position |
| Risk to reward ratio | Move a take profit, test seven targets on a random chart | The win rate each RR needs, and why RR alone isn't an edge |
Each lesson takes a few minutes and needs no sign-up. This browser remembers which lessons you finished and marks them here.
Where do the numbers come from?
The strategies in the lessons are made up, so their odds are known exactly. The simulations run them at those odds, and the numbers on these pages are worked out from the same odds.
Real strategies never come with known odds.
Start with lesson 1 and add up your first 10 trades.