Risk Management for Traders
Risk management is the combination of risk per trade, stop placement, position sizing, and survivability. Get any one of these wrong and even a winning strategy can blow up.
Your edge doesn't matter if you size too big.
The Risk Management Stack
Set a Risk-Per-Trade Rule
Risk per trade is your throttle. Most traders use 0.5%–2% of their account per trade as a starting range. Smaller risk means you can survive longer losing streaks.
Not sure how risk per trade affects blow-up probability? Compare Stop Loss vs Risk of Ruin →
Define Stop Loss + Take Profit
Your stop is not a pain threshold — it's the price where your trade idea is invalidated. Define it before you enter, and don't move it to avoid a loss.
Use Breakeven Calculator → to check if the win rate required is realistic.
Size the Position From the Stop
Stops don't control risk unless your size matches the stop. Calculate how many shares or contracts you can buy so that if you're stopped out, you lose exactly your planned risk amount.
Want to compare fixed sizing vs Kelly-based sizing? Compare Position Size vs Kelly →
Validate Survivability (Avoid Blow-Ups)
Use Risk of Ruin with your actual win rate and payoff ratio assumptions. A "ruin threshold" is the drawdown level you consider unacceptable (e.g., -50%). Check that your risk per trade keeps ruin probability low.
Advanced: Kelly (Only If Edge Is Measured)
Kelly Criterion calculates the optimal bet size to maximize long-term growth — but only if your edge estimate is accurate. If your edge is wrong, Kelly oversizes you. Most traders use fractional Kelly (25–50% of full Kelly) to reduce volatility.
Unsure whether to use Kelly or fixed sizing? Compare Position Size vs Kelly →
Recommended Flow
- Choose risk per trade — decide how much you can lose before you trade
- Set stop + target — define invalidation and exit levels
- Size from stop — calculate position size so stop = planned loss
- Check risk of ruin — validate your setup won't blow you up
- Optional: compare vs fractional Kelly — if you have measured edge data
Common Failure Modes
- •Risking 5%+ per trade — a 5-trade losing streak wipes 25%+ of your account
- •Tight stops + oversized positions — getting stopped out constantly while still taking big losses
- •No max drawdown rule — not reducing size after losses compounds the damage
- •Confusing "profitable" with "survivable" — a positive expectancy doesn't guarantee you survive long enough to realize it
- •Changing assumptions without resizing — if your win rate or payoff changes, your position size should too
Related comparisons
Frequently Asked Questions
What percent should I risk per trade?
Most traders use 0.5%–2% of their account per trade. The right number depends on your win rate, payoff ratio, and tolerance for drawdowns. Use the Risk of Ruin Calculator to see how different risk levels affect your probability of hitting a drawdown threshold.
Is a stop loss required for every trade?
Yes. A stop loss defines the maximum you can lose on a trade. Without one, a single bad trade can wipe out months of gains. Even mental stops should be defined before entry — and honored when hit.
Why can a profitable strategy still blow up?
A strategy with positive expected value can still hit a losing streak long enough to wipe you out if you're risking too much per trade. Survivability is about whether you can stay in the game long enough for your edge to play out. Risk of Ruin measures this directly.
What is a ruin threshold and how should I choose it?
A ruin threshold is the drawdown level you consider unacceptable — the point where you'd stop trading or significantly change your approach. Common choices are -25%, -50%, or -75%. Choose a level that matches your risk tolerance and capital situation.
Should I use Kelly Criterion for trading?
Kelly Criterion is mathematically optimal for maximizing long-term growth, but it requires accurate estimates of your win rate and payoff ratio. If your estimates are wrong, Kelly oversizes you. Most practitioners use fractional Kelly (25–50% of full Kelly) to reduce volatility and account for estimation error.