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Lesson 7 of 8
Risk Management & Psychology
Why Risk Management Matters
Risk management is the difference between surviving and thriving as a trader. Without it, even the best strategy will fail eventually.
| Loss | Gain Needed to Recover |
|---|---|
| 10% | 11% |
| 25% | 33% |
| 50% | 100% |
| 75% | 300% |
Position Sizing
Never risk more than 1-2% of your account on any single trade. This is the most important rule in trading.
Position Size = (Account Γ Risk %) / (Entry - Stop Loss)
Stop-Loss Placement
- Place below support (for longs) or above resistance (for shorts)
- Give enough room for normal volatility
- Never move stop-loss further away from entry
- Consider trailing stops to lock in profits
Risk-Reward Ratio
Aim for at least 2:1 reward to risk. This means your target should be at least twice as far as your stop-loss. With 2:1 R:R, you only need to win 33% of trades to break even.
Trading Psychology
FOMO
Fear of Missing Out. Causes chasing, buying tops. Cure: Wait for your setup.
Revenge Trading
Trying to win back losses quickly. Leads to bigger losses. Cure: Take a break after losses.
Overconfidence
After wins, taking excessive risk. Cure: Stick to your rules regardless of recent results.
Loss Aversion
Holding losers too long, cutting winners too early. Cure: Pre-define exits.
π Key Takeaways
- Review this lesson's material before moving on
- Practice the concepts on a demo account
- Take notes on what you've learned