Why Do We Risk Too Much?

It’s usually because of one of these:

Overconfidence: After a winning streak, it’s easy to believe the next trade will be just as good—so you go bigger than usual.

Revenge Trading: After a loss, the urge to “win it all back” leads to taking on even more risk.

Lack of a Risk Plan: Without clear rules, it’s easy to let emotions dictate how much you’re willing to put on the line.

Think of Your Capital as Your Tool

Imagine you’re a chef, and your knives are your tools. You wouldn’t take risks that could dull or damage them—they’re what allow you to do your job effectively.

For traders, your capital is your tool. Without it, you can’t trade. Every trade should be about protecting and growing that tool—not putting it in unnecessary danger.

How to Protect Your Capital

Set a Maximum Risk per Trade:

Decide in advance what percentage of your account you’re willing to risk on any single trade. A common rule of thumb is 1-2%. This way, even a losing streak won’t wipe you out.

Use Stop Losses:

A stop loss isn’t just a safety net—it’s a discipline tool. It prevents small losses from turning into big ones.

Calculate Position Sizes:

Your position size should be based on your risk level and the distance between your entry and stop loss. For example, if you’re risking 1% of your account, your position size will vary depending on how tight or wide your stop loss is.

A Quick Calculation:

Here’s a simple formula to determine your position size:

Decide how much you’re willing to risk (e.g., $100 for a $10,000 account at 1%).

Divide that by the distance between your entry and stop loss (e.g., $2 per share).

That’s your position size (e.g., 50 shares).

Following this rule not only protects your account but also helps you stay calm during trades—you already know the worst-case scenario.

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