Lesson 6: Risk Management Essentials
You'll Learn: How to protect your trading account like a seatbelt protects drivers
The 2% Golden Rule
What is Position Sizing?
Determining how much money to risk per trade - like deciding how much fuel to use for a car trip
Example Calculation:
Account Balance: $10,000
Risk Per Trade (2%): $200
Stop Loss Distance: 50 pips
Position Size: $200 ÷ 50 = $4 per pip
Trade Size: 0.4 lots
Car Trip Analogy:
Would you risk 50% fuel on one trip?
No → Don't risk 50% capital on one trade!
Your Trading Airbag
Fixed Stop Loss
Set at key technical level
Example: 50 pips below entry
Trailing Stop
Moves with profitable trades
Example: 30 pips behind price
Volatility Stop
Based on market movement
Example: 2x Average Daily Range
Historical Lesson:
2015 Swiss Franc Crisis - Traders without stops lost entire accounts in minutes
The Profit Probability Game
Risk: 1
Reward: 3
Why 1:3 Ratio Works
The Leverage Trap
100:1 Leverage
$1,000 controls $100,000
5% move = 500% profit/loss
10:1 Leverage
$1,000 controls $10,000
5% move = 50% profit/loss
2008 Lesson:
Over-leveraged traders lost homes during financial crisis
Trading Mindset
Emotional Traps
- Revenge trading after losses
- Overtrading during boredom
- Fear of missing out (FOMO)
Pro Habits
- Daily trade journal
- Fixed trading hours
- Regular breaks every 2 hours
Successful Trader Routine:
1. Review economic calendar
2. Set daily loss limit
3. Analyze 3 potential trades
4. Stick to trading plan
Risk Scenario
Account: $5,000 | Trade: GBP/USD
Entry: 1.3000 | Stop Loss: 1.2950 (50 pips)
What's the maximum position size?
Risk Per Trade (2%): $100
Risk in Pips: 50
Pip Value: $100 ÷ 50 = $2 → 0.2 lots
Wait! GBP/USD pip value is $10 per lot
Correct Size: $2 ÷ $10 = 0.2 lots