Risk Management: Module Review
This module covered the full spectrum of risk management. Position sizing, risk-reward, drawdowns, psychology, Kelly criterion, preservation strategies, and practical implementation. Let me consolidate the core principles that tie everything together.
Risk management is not a collection of separate techniques. It is a unified system built on 1 foundation. Survival enables compounding, and compounding creates wealth. Every concept in this module connects to that foundation.
Position sizing ensures no single trade can threaten survival. The 1% to 2% rule is not arbitrary. It is the math of staying in the game through inevitable losing streaks. Risk-reward analysis ensures you are only taking trades where the math works in your favor. Combined with realistic win rate assessment, it tells you whether a strategy can actually make money. Drawdown management acknowledges that losses happen and prepares you for them. The recovery math is unforgiving. Avoiding deep drawdowns is more valuable than chasing big gains. Loss psychology addresses the human element that derails even mathematically sound strategies. Pre-acceptance, identity reframing, and understanding loss aversion help you execute when your brain fights you. The Kelly Criterion provides a mathematical ceiling for position sizing based on your edge. Fractional Kelly gives you the benefits without the volatility. Preservation strategies create automatic systems that protect you from yourself. Circuit breakers, scaling rules, and knowing when to stop remove decisions from emotional moments. Practical implementation turns principles into daily habits. Checklists, routines, and written plans make good risk management automatic rather than aspirational.
Commit these numbers to memory.
- Risk per trade should be 1% to 2% of account.
- Daily loss limit should be 2% to 3% of account.
- Weekly loss limit should be 5% to 6% of account.
- Monthly loss limit should be 10% of account.
- Drawdown scaling trigger should start at 5% to 10%.
- Recovery from 50% loss requires 100% gain.
- Kelly fraction to use should be 25% to 50% of full Kelly.
The biggest change this module asks of you is not mathematical. It is psychological. From trading to make money to trading to not lose money and letting profits follow. From viewing losses as failures to viewing losses as tuition and data. From sizing based on conviction to sizing based on risk tolerance. From hoping trades work out to accepting outcomes before they happen. From trusting yourself in the moment to trusting systems built when calm.
These shifts feel counterintuitive. Every instinct says to bet big on your best ideas, to hold losers hoping for recovery, to trade more when you are losing. The traders who survive learn to override these instincts with systems.
After studying hundreds of trading careers, the pattern is clear. The traders who last do not have magical strategies or superior intelligence. They have consistent position sizing that prevents any single trade from mattering too much. They have hard rules they actually follow, especially when losing. They have emotional awareness that lets them recognize when they are compromised. They have the humility to reduce size and stop trading when things are not working. They have patience to let compounding work over years, not days. None of this is exciting. Risk management never is. But exciting traders tend to become former traders.
Before continuing to the next module, complete these actions. Write your 1-page risk plan. Include position sizing rules, circuit breakers, scaling thresholds, and non-negotiables. Calculate your Kelly. Using your best estimate of win rate and payoff ratio, find your full Kelly and decide on your fraction. Set up tracking. Create a simple spreadsheet or journal to track trades in R-multiples. Define your drawdown response. At what levels will you scale down? At what level will you stop completely?
The concepts in this module will protect you from the most common ways traders fail. Not from all failure. Markets are unforgiving, and no amount of risk management guarantees success. But from unnecessary failure. From the preventable blowups that end careers before they really begin. That protection is worth more than any entry signal or trading strategy you will ever learn.
Up next: Technical Foundations covers support and resistance, trend identification, chart patterns, and indicators, but with the context you now have from understanding market mechanics and volume analysis, these tools will make far more sense.