Risk Management in Trading

The recovery problem

Losses and gains are not symmetric. A twenty percent drawdown requires a twenty-five percent gain to recover; a fifty percent drawdown requires one hundred percent. This asymmetry is the entire argument for conservative sizing. Protecting the downside is not caution for its own sake — it is the mathematically cheapest way to compound.

It follows that avoiding large losses matters more than capturing large gains. A method with modest returns and shallow drawdowns will outperform a volatile one over a long enough horizon, and it is far easier to keep following.

Risk per trade

Fix the amount you are willing to lose on any single position as a percentage of equity — commonly between half a percent and two percent. Then derive position size from that figure and your stop distance. This inverts the instinct to choose a size that feels right and place a stop where it fits.

Recalculate as equity changes. Risking a fixed percentage means positions shrink automatically during drawdowns and grow during expansion, which is precisely the behaviour you want and precisely the behaviour discretion fails to deliver.

• Define maximum risk per trade before entry, in currency terms
• Derive size from stop distance, never the reverse
• Cap total open risk across all positions, not just each one

Correlation: the hidden concentration

Five positions in different instruments can be one position in disguise. Currency pairs sharing a common currency, indices in the same region, and commodity producers alongside the commodity itself all tend to move together during stress. Aggregate your exposure by underlying driver, not by ticker.

A practical rule: treat highly correlated positions as a single risk unit and apply your per-trade limit to the group.

Stops that mean something

A stop should mark the point at which your reason for entering is invalid. Placing it there and sizing accordingly is coherent. Placing it where the loss feels tolerable, regardless of structure, produces stops that are hit routinely by ordinary noise.

Use protective orders rather than mental stops. Under pressure, intentions dissolve; resting orders do not.

Reviewing risk with the right tools

Platforms differ in how prominently they display margin, exposure and open risk. That visibility shapes behaviour, which is why our PaltusTrade review treats risk tooling as a first-class evaluation criterion rather than a footnote.