The set of rules that limit how much you can lose on one trade, one day, and in total, so that no single outcome ends your trading.
Risk management is not one number; it is a stack of limits. Per trade (risk-per-trade), per day or week (a loss cap), and across open positions (portfolio-heat). It also covers leverage, correlation between positions, and what you do after a losing streak.
It matters because drawdowns are asymmetric: a 50% loss needs a 100% gain to recover. Every durable trader has strict risk rules; the rules are what make expectancy survivable.
Example: 1% risk per trade, 3% daily cap, 6% total open risk. On a $25,000 account that is $250 per trade, stop trading for the day at -$750, and never more than $1,500 at risk across all positions.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Expectancy: the average trade. Forty trades sorted by outcome: 24 small losses and 16 larger wins. Weighting each side by how often it happens gives the average result per trade, marked here by the dashed line at +$120.Equity curve and drawdown. An account balance plotted month by month. The fall from the $16,000 peak to the $12,000 trough is a 25% drawdown, and the shaded area lasts until the balance climbs back to the old peak.
Educational only, not advice. Spotted an error? Post in Site Feedback.