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Risk Management

Risk Management 101: Protect Your Trading Capital

Learn the fundamentals of risk management. Position sizing, stop losses, and risk-reward ratios explained.

TrackIt Team 5 min read1/7/2026

Key takeaways

  • In summary, never risk more than 1-2% of your account on any single trade to survive losing streaks.
  • Position Size Formula: (Account Size × Risk %) / (Entry Price - Stop Loss) = Number of shares/contracts.
  • Always determine your stop loss BEFORE entering a trade. Only take trades with 1:2 or better risk-reward ratio.
  • Set a maximum daily loss limit (e.g., 3%)—when hit, stop trading for the day.

Introduction

Risk management is the foundation of long-term trading success. Without it, even the best trading strategy will eventually blow up your account.

The Golden Rule: Never Risk More Than 1-2% Per Trade

Professional traders rarely risk more than 1-2% of their account on any single trade. Smaller risk means you can survive losing streaks.

Position Sizing Formula

Position Size = (Account Size × Risk %) / (Entry Price - Stop Loss)

Example:

  • Account: $10,000
  • Risk: 1% ($100)
  • Entry: $50, Stop Loss: $48
  • Position Size = $100 / $2 = 50 shares

    • Setting Stop Losses

    A stop loss is a predetermined exit price. Types include:

    Technical Stop

    Based on chart levels (support, moving averages)

    Percentage Stop

    Fixed percentage from entry (e.g., 5%)

    ATR-Based Stop

    Based on Average True Range for volatility adjustment

    **Key Rule**: Always determine your stop loss BEFORE entering a trade.

    Risk-Reward Ratio

    Only take trades where potential reward exceeds risk:

  • 1:1.5 - Acceptable
  • 1:2 - Good
  • 1:3 - Excellent

    • The Maximum Daily Loss Rule

    Set a maximum daily loss limit (e.g., 3% of account). When you hit it, stop trading for the day.

    Conclusion

    Risk management isn't about avoiding losses—it's about surviving them. Protect your capital, and you'll always have another chance to profit.