Risk and money management

Stops, targets, risk-to-reward, position sizing, leverage, drawdowns, correlation, loss limits and risk of ruin.

1. Rule one: stay in the gameLose half your money and you must double what is left just to get back to the start.
2. The stop-loss: decide your exit firstA stop-loss is the price where your idea is wrong, and you choose it before you enter.
3. Taking profit: plan the exitDecide where you will take profit before you enter, so greed does not decide for you.
4. Risk-to-reward ratioIf you risk 1 to make 2, one win pays for two losses.
5. Risk a small sliceRisk only a small slice, like 1%, on any one trade, so no single loss can knock you out.
6. Position size from your stopThe money you are willing to lose divided by the distance to your stop tells you how big the position can be.
7. Win rate and reward work togetherWith bigger wins you can afford to be wrong more often, and with small wins you must be right a lot.
8. Stops that fit the marketA calm market needs a short leash and a wild market needs a longer one, and ATR tells you which is which.
9. Leverage and margin: the double-edged swordLeverage lets a small deposit control a big position, so small moves become big wins and big losses.
10. Drawdowns and losing streaksEven a good plan has losing streaks, so plan for them before they happen.
11. Trailing stops and breakevenAs price moves your way you can move your stop behind it, but never further away.
12. Gaps and slippage: when stops are not guaranteedA stop is an order to get out, not a promise of the price you will get.
13. Correlation: hidden double betsIf two trades always move together, holding both is like making one bigger bet.
14. Daily loss limits and total open riskDecide in advance when to stop trading for the day, because upset traders make worse decisions.
15. Risk of ruin and your risk rulebookBet too big and even a winning method can go broke, so write your risk rules down and follow them.