Risk Management Mastery

You'll Master: Advanced position sizing, volatility-based risk management, and portfolio hedging strategies

Why Go Beyond Basics?

Advanced risk management is essential for consistent profitability as your trading evolves. By adapting your position size to volatility and hedging your portfolio, you can better withstand market shocks and optimize returns.

1. Advanced Position Sizing

Dynamic Sizing:

Instead of fixed lot sizes, adjust your position based on trade risk and account equity. This approach keeps your risk consistent as your account grows or shrinks.

Kelly Criterion Example

  • Kelly % = Win Rate - [(1 - Win Rate) / Risk-Reward Ratio]
  • Use a fraction of Kelly for safety (e.g., 50%)
  • Example: Win rate 55%, RR 2:1 → Kelly % = 0.55 - (0.45/2) = 0.325 or 32.5%

2. Volatility-Based Risk

Adapting to Market Conditions:

Use volatility indicators (like ATR) to set stop-losses and position sizes. Higher volatility means wider stops and smaller positions; lower volatility allows tighter stops and larger positions.

ATR-Based Example

  • ATR (14) = 50 pips
  • Set stop-loss = 1.5 × ATR = 75 pips
  • Position size = (Account Risk $) / (Stop-Loss in Pips × Pip Value)

3. Portfolio Hedging

Reducing Overall Risk:

Hedging involves opening positions that offset risk in your portfolio. This can be done by trading negatively correlated pairs or using options/futures to protect against adverse moves.

Hedging Example

  • Long EUR/USD and short GBP/USD (correlated pairs)
  • Buy a put option to protect a long position
  • Balance exposure across currencies to avoid concentration risk

4. Advanced Risk Checklist

  • ☑️ Position size adapts to account equity and risk
  • ☑️ Stop-loss set using volatility (ATR or similar)
  • ☑️ Portfolio exposure is diversified and hedged
  • ☑️ Risk per trade and total portfolio risk are monitored
  • ☑️ No overexposure to correlated assets

Practice Zone

Homework:

  • Calculate position size for 3 trades using ATR-based stops
  • Identify correlated pairs in your portfolio and plan a hedge
  • Review your last 10 trades for volatility and correlation risk

Next Step: Apply volatility-based risk in your next demo trades!

Next: Market Correlation →