1
Controllable risk
You can control position size, planned exit, total exposure, and whether a trade is taken.
Lesson · Trading Risk Management
Risk Management Fundamentals
Sort a trade's variables into the ones you set and the ones you absorb, state the planned loss in dollars before entry, and separate market uncertainty from account damage.
Core concepts
What to understand
Keep the process direct: define the risk, calculate it, and enforce the limit.
2
Uncontrollable outcome
You cannot control the next price move, gaps, news, or the order in which wins and losses arrive.
3
Survival first
A strategy can only produce long-term results if normal losses do not remove the ability to continue.
Interactive lab
Change the risk conditions
Adjust the controls and read the market behavior and account impact after each change.
Risk Management Fundamentals Lab
Synthetic educational data · no live market connection
RISK MODEL
Risk process
Apply it in order
Risk calculations should happen before the order is submitted.
Define the invalidation
State the price condition that proves the trade thesis wrong.
Convert it to dollars
Measure the distance from entry to invalidation and multiply by position size.
Check total exposure
Include open positions, correlation, leverage, and execution risk before entering.
Knowledge check
Check your understanding
Select one answer for each question. Feedback appears immediately.
1. Which variable is directly controlled before entry?
Position size is selected before entry; the next candle and volatility are market outcomes.
2. A strong setup loses. What does that prove?
A valid process produces a distribution of outcomes, including losses.
3. What is the first objective of risk management?
Risk management keeps individual and accumulated losses within planned limits.
4. Equity is $40,000 and the risk per trade is 1.25%. What is the planned loss in dollars?
$40,000 × 1.25% = $40,000 × 0.0125 = $500. That figure is set before entry; the outcome is not.
Practical rules
- Define maximum loss before entry.
- Calculate position size from the stop distance.
- Treat unexpected gaps and slippage as additional risk.
Common mistakes
- Assuming confidence should increase position size.
- Moving the stop because the trade is losing.
- Measuring risk only after the position is open.
References
Official reading
The labs use simplified synthetic examples. These sources cover the underlying risk and execution concepts.
FINRA · Risk
General overview of investment risk and risk tolerance.
CME Group · Trade and Risk Management
Position and loss planning before entering a trade.