Critical Importance
Risk management is the most important skill in trading. More traders lose money from poor risk management than from bad trade ideas. Master these principles before focusing on strategies or profits.
The 4 Pillars of Risk Management
The 1% Rule
Never risk more than 1% of your total capital on a single trade
Example:
If you have $10,000, never risk more than $100 per trade
The 50% Rule
Never allocate more than 50% of capital to crypto trading
Example:
Keep the other 50% in traditional investments or cash
Stop Loss Rule
Always set stop losses before entering any position
Example:
Set stop loss at 5-10% below entry for swing trades
Risk/Reward Ratio
Target at least 2:1 reward-to-risk ratio on every trade
Example:
If you risk $100, target at least $200 profit
Position Sizing Formula
How to Calculate Position Size
Use this formula to determine exactly how much to invest in each trade:
Example Calculation
Position Size by Risk Level
Portfolio Allocation Strategy
Proper portfolio allocation ensures you can survive market downturns and continue trading. Here's a recommended allocation for most traders:
Why This Allocation Works
- • Emergency fund prevents forced selling during bad times
- • Conservative investments provide stability and income
- • Growth investments build long-term wealth
- • Limited crypto exposure controls overall portfolio risk
Trading Psychology & Emotions
Emotional control is crucial for risk management. Fear and greed cause more losses than bad market analysis.
Mental Rules for Traders
Accept that losses are part of trading - focus on probabilities, not individual trades
Keep a trading journal to identify emotional patterns and mistakes
Never trade when angry, stressed, or emotional - take breaks
Don't chase losses with bigger positions - stick to your plan
Celebrate small wins and learn from losses without self-blame
Use position sizing to manage stress - smaller positions = less stress
Common Risk Management Mistakes
Deadly Mistakes
- • Risking too much per trade (>5%)
- • Not setting stop losses
- • Moving stop losses against you
- • Doubling down on losing trades
- • Trading with emotion instead of logic
- • Not diversifying across different assets
Success Habits
- • Always use position sizing formulas
- • Set stops before entering trades
- • Keep detailed trading records
- • Review and adjust risk rules regularly
- • Take breaks during losing streaks
- • Focus on process, not profits