📘 Lesson 9: Capital Management in Trading

🔹 What Is Capital Management?

Capital Management (Money Management) is the strategy a trader uses to determine how much money to risk per trade in order to:

Minimize major losses.

Protect core capital.

Achieve consistent long-term profits.

In simple terms: How do you protect your money while trading?

🎯 Why Is Capital Management Important?

Even if you’re a skilled technical analyst, poor money management can wipe out your account quickly.

In trading, survival is more important than quick wins.

Here’s why:

📉 Losses are a natural part of the market

🧠 Emotional decisions often follow large losses

🔁 Staying in the game is more valuable than a single big win

🧮 Key Principles of Capital Management:

1. Risk No More Than 1–2% Per Trade.

Example: If your capital is $1,000, you should risk no more than $10–$20 per trade.

2. Stop Loss Is Mandatory:

Never enter a trade without setting a stop-loss to protect against sudden market crashes.

3. Risk/Reward Ratio:

Aim for a minimum risk-to-reward ratio of 1:2 or 1:3.

Example: Risk $10 to make $20 or $30.

4. Don’t Go All-In:

Diversify your positions. Never invest your entire capital in one trade or asset.

5. Don’t Chase the Market:

If you lose a trade, avoid jumping into another just to “make it back.” Emotional trading leads to bigger losses.

📊 Practical Example:

Let’s say you have $1,000 in your trading account.

You decide to risk 2% per trade = $20

The distance between entry and stop-loss = $10

👉 So your position size = $20 ÷ $10 = 2 units only

And your take-profit target could be $30 (giving you a 1:1.5 ratio at least)

🛑 Common Capital Management Mistakes:

Trading your full balance on a single trade.

Ignoring stop-losses.

Increasing trade size after a loss.

Overusing leverage without controlling risk.

✅ Lesson Summary:

🔸 A successful trader isn’t measured by the number of wins, but by their ability to stay in the market long-term.

🔸 Capital management is your protective armor.

🔸 Respect the rules—never trade emotionally.

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