Professional Risk Management

You'll Master: Advanced position sizing models and correlation risk analysis

What is Professional Risk Management?

Protecting Capital Like a Pro:

Professional risk management goes beyond basic stop losses. It uses advanced models to control exposure, manage portfolio risk, and adapt to changing market correlations.

  • Position Sizing Models: Calculate optimal trade size for each setup
  • Correlation Risk: Manage exposure across related assets
  • Portfolio Approach: View risk at the account level, not just per trade

Advanced Position Sizing Models

Precision in Every Trade:

Position sizing determines how much to risk on each trade. Advanced models like Kelly Criterion, fixed fractional, and volatility-based sizing help maximize growth while controlling drawdowns.

  • Fixed Fractional: Risk a set % of equity per trade
  • Volatility-Based: Adjust size based on market volatility (e.g., ATR)
  • Kelly Criterion: Optimize size for long-term growth
[Insert Position Sizing Formula Chart Here]

Correlation Risk Analysis

Don't Double Your Risk:

Assets can move together. Correlation risk means losses can multiply if you’re exposed to similar trades. Analyze correlations to diversify and avoid concentration risk.

  • Asset Correlations: Identify pairs that move together
  • Diversification: Spread risk across uncorrelated assets
  • Hidden Exposure: Watch for indirect correlations in your portfolio
[Insert Correlation Matrix Example Here]

Applying Professional Risk Management

1

Calculate risk per trade using advanced sizing models

2

Check correlations between open positions

3

Limit total portfolio risk to a safe threshold

4

Adjust exposure during high volatility or news events

5

Review and rebalance your portfolio regularly

Use a risk calculator and correlation matrix to guide your decisions.

Example: Managing Correlated Trades

Scenario:

If you’re long EUR/USD and GBP/USD, both may react similarly to USD news. Adjust your position sizes or diversify to avoid doubling your risk.

[Insert Correlated Trades Risk Chart]

Key Risk Management Rules

Stay in the Game:

Follow strict rules to protect your capital and survive market swings.

  • Max Risk per Trade: Usually 1-2% of account equity
  • Max Open Risk: Limit total risk across all trades
  • Correlation Cap: Avoid overexposure to correlated assets
  • Dynamic Sizing: Adjust for volatility and news

Practice Zone

Review the lesson above to find the answers!

Homework Assignment:

  • Calculate position size for a trade using fixed fractional and volatility-based models
  • List three currency pairs with high correlation and explain the risk
  • Analyze your current portfolio for correlation risk
  • Write a checklist for professional risk management before entering a trade
  • List three rules to limit total portfolio risk
Next: Market Sentiment Analysis →