Risk Management: PART 2

READ PART 1 FOR PRIOR INFO 2. The Core Principles of Risk Management b. Position Sizing Position sizing refers to how much of your capital you are willing to risk on a single trade. This is one of the most crucial aspects of risk management. How to Calculate Position Size: • Determine the amount you're willing to risk on a trade, typically a small percentage of your total capital (e.g., 1-2%). • Stop-Loss Distance: Identify the distance between your entry price and stop-loss level. Example: • If you're risking 1% of your capital on a $10,000 account, the risk amount is $100. • If the stop-loss is set 50 pips away from the entry, your position size would be $100 / 50 pips = 2 contracts (depending on the asset and pip value). c. Setting Stop-Loss and Take-Profit Orders Stop-loss and take-profit orders are essential risk management tools that help you control how much you can lose and lock in profits automatically. • Stop-Loss: A stop-loss is an order placed to close a position when the price moves against you by a specified amount. It limits the potential loss on a trade. Example: If you're buying a stock at $100 and set a stop-loss at $95, your maximum loss would be $5 per share if the stock hits $95. • Take-Profit: A take-profit order is an order that automatically closes your position when a price level is reached, securing your profits. Example: If you buy a stock at $100 and set a take-profit at $110, your maximum gain would be $10 per share if the stock hits $110. d. Maximum Drawdown and Risk Tolerance Drawdown is the reduction in your trading account from its highest point to its lowest point, often due to a series of losing trades. Knowing your maximum drawdown and risk tolerance is vital in setting realistic expectations for your trading. • Maximum Drawdown: The biggest loss from peak to trough during a specific period. • Risk Tolerance: Your willingness to withstand drawdowns in order to achieve long-term