Introduction
You know what's the difference between a trader who survives a market downturn and one who loses their entire investment on one bad day? Risk management. That unglamorous word—"risk management"—sounds boring, but it's what separates winners from losers in the stock market. In fact, research shows that risk management is the most important element of consistent profit—far more important than the trading strategy itself.
Many people come to the stock market with the idea that success is a matter of finding a "magic strategy." But that's a mistake. Professional traders know something different – success is a matter of how much you lose, not how much you win. Sounds paradoxical? Read on, and all will become clear.
What Is Risk Management Actually?
Let's start with a definition. Risk management is a set of procedures and strategies designed to limit potential losses while protecting your trading capital. Simply put, it's a plan for when you're wrong .
Every trader makes mistakes. Even the best. But those who achieve consistent profits know exactly how much they can lose on each trade. And that's risk management—preparing for failure before it happens.
Imagine going to a casino. Would you go there with all your savings? Of course not. You'd only take what you can afford to lose. Risk management in the stock market is exactly the same approach—but with calculation, strategy, and discipline.
The 1-2% Rule – Your First Line of Defense.
Forget everything you've heard about "earning 50% a month" or "doubling your account." Professional traders say one thing: never risk more than 1-2% of your capital on a single trade .
Why 1-2%? Math. If you risk 2% on each trade and lose 10 times in a row (which can happen), you'll lose 20% of your account. You can still play. If you risk 10%, 10 losses is -100% – game over.
Here's a specific example:
You have an account worth PLN 10,000. Risk per trade: PLN 200 (2% of capital).
Let's say it's a bad period and you lose 5 times in a row. You lose 1,000 PLN. You still have 9,000 PLN.
I can get back into the game, start making money, and within a few winning trades we will be back to our initial capital.
Now compare this to a trader who risks 10% per trade: PLN 1,000 per position.
Five losses = PLN 5,000 lost. Now he only has PLN 5,000. To get back to PLN 10,000, he needs to double his account. Mentally, this is much more challenging.
But these aren't just statistics—they're pure psychology. When you know your maximum loss is 2% of your account, fear transforms into simple, rational respect. You can think logically. You can execute your plan.
Position Size – How to Calculate How Much to Buy
Now that you know you are risking 2% (or less), the practical question becomes: how many shares, or how many lots, to buy?
This is called positioning (position sizing), and it is a key element of risk management.
The formula is simple:
Number of shares = (Capital × Risk %) / (Entry Price – Stop-Loss Price)
Specific example:
Capital: PLN 20,000
Do you want to risk: 2% = PLN 400
Entry: PLN 50 per share
Stop-Loss: PLN 45 per share
Risk per share: PLN 5
Number of shares = 400 / 5 = 80 shares
You buy 80 shares. Your maximum loss is PLN 400 – exactly 2% of your account.
Why is this so important? Because it changes the game completely. Instead of thinking, "How much can I earn?", you think, "How much can I lose?" And that's proper trading thinking.
Stop-Loss – Your Emergency Escape.
A stop-loss is one of the two most important tools in risk management. It's simply a pre-determined price at which you sell your position to limit your loss .
But here's the catch – most traders know about stop-losses but don't use them. Why? Psychology. When the price drops below the stop-loss, you think, "Maybe it'll rebound, keep waiting." And you wait. And you lose twice as much. And then you change your plan and set the stop-loss even deeper.
This is a classic mistake everyone makes at the beginning.
Here are some rules for stop losses:
Set a stop-loss BEFORE you enter a position—not after you enter. Once you're in a position, emotions run high.
Never move your stop-loss towards a loss – you can move it towards a profit (say, to secure some profit), but not towards a larger loss.
Treat your stop-loss like a personal order – if the price reaches it, you sell. End of discussion.
Take-Profit – Securing Profit
The second key element is take-profit – the price at which you sell to secure a profit .
Many people do this wrong. Instead of setting a take profit based on technique (e.g., resistance or risk-reward), they set it based on "feel."
The rule of thumb for professional traders is a risk to reward ratio of at least 1:2 – if you risk PLN 200 per position, you should bargain for at least PLN 400 in profit.
Why? Math again. If you're earning 2:1, you only need to win 40% of your trades to be profitable.
Example:
You risk PLN 200 (this is your stop-loss)
Profit target: PLN 400 (2x risk)
You win 4 times, you lose 6 times
Profit: (4 × 400) – (6 × 200) = 1600 – 1200 = +400 PLN
In reality, you lost MORE than you won. But you made money because your risk-to-reward ratio was good.
Diversification simply means – don’t always trade the same assets, don’t keep all your positions in one sector, don’t risk everything on one market.
If you're a cryptocurrency investor, don't trade 100% of your capital in Bitcoin. If you're a stock trader, don't keep all your money in one sector (e.g., technology).
But here's an important rule for you – diversification doesn't mean trading a million things at once. It means spreading your capital wisely.
Example: A "Balanced" Portfolio (For Most People)
50% stocks (globally: US + Europe + emerging markets; preferably broad-based ETFs).
30
10
10
Daily Loss Limit
Professional traders use one simple rule: when I reach my daily loss limit, I log off and read the newspaper for the rest of the day .
The daily loss limit is usually 5–10% of your total capital. Once you reach this limit, you stop trading. Why? Because on such days, your brain doesn't function properly. Decisions are made based on emotion, not logic.
This is a very simple element of risk management, yet few people practice it. And it's one of the main reasons they lose money.
Stress Testing – Prepare for the Worst
This isn't something you do on a regular basis, but every few months you'll analyze your strategy for extreme scenarios .
Ask yourself:
What would happen if it was the same as Black Monday 1987?
What if there was a 30% decline in one market?
Would my system survive?
This may seem paranoid, but that's what large financial institutions do. They test their strategies on crazy scenarios before they actually happen.
You can do the same with historical data – check how your strategy performed during the 2008 crash, the 2020 pandemic, or the 2024 crash.
Psychology and Risk Acceptance
Here we come to the real core of risk management – psychology .
It doesn't matter what your risk plan is if you're not mentally prepared to accept it. If you tell yourself, "I'm risking 2% per trade," but deep down you're saying, "But what if I lose it all?" then you haven't mentally accepted that risk.
Trading psychology experts (like Mark Douglas, who wrote "Trading in the Zone") say you must fully accept the risk BEFORE you enter a position. This means:
Accept that this particular trade may be a loss
Realize that this is one of millions of trades in your career
Think in terms of probability, not certainty
When you do this, something strange happens—the fear disappears. Not because the risk has decreased, but because you've mentally accepted it.
Trading Journal – Your Risk Management Book
Finally – a tool that virtually every trader talks about but few do: the trading journal.
You record every trade:
When did you come in?
Why did you come in?
Where was your stop-loss and take-profit
What was your risk percentage
What was the result
What were your emotions?
After a few months, you'll see patterns. You might find that you're losing money especially when trading at 3:00 PM. Or that your best strategies always occur when you ignore your stop loss. Or that your winning trades are always too short.
The journal is your mirror. It shows you where your risk management weaknesses lie.
Summary – Risk Management Is a Long Game
We've been through a lot. Here's what you should remember:
Never risk more than 1-2% per trade – this is a hard limit.
Positioning is calculated based on risk, not profit – how much you can lose, not how much you want to earn.
Stop-loss and take-profit are essential – set them before you enter.
1:2 risk to reward ratio – if you have a good strategy, this is enough.
Diversify your disaster protection – spread your risk.
Daily Loss Limit – When you reach your limit, you leave the game.
Psychology and risk acceptance – this is the biggest battle.
Trading Journal – Learn from your mistakes.
Risk management isn't a magic bullet. It's boring, systematic work. But it's boring, systematic work that all billionaires do. There's nothing you can do about it.
Ultimately, remember – risk management isn't about not losing money (because you will). It's about controlling how much you lose so you can continue to play. And in trading, whoever plays the longest wins.
What are your experiences with risk management? Do you have a magic method or risk limit that works for you? Share your thoughts in the comments – we'd love to discuss what works for different traders.
If you purchase the eBook, you'll also receive the Trader's Journal – a practical downloadable and printable supplement that will help you reach a more informed, "business-like" level of trading. It includes a ready-made template for recording each trade (pre-entry plan, SL/TP, risk, R:R), a space for emotions and observations, and a section for post-trade reflection. It also includes pre- and post-trade checklists, a weekly review, and a 30/60/90-day action plan that helps you develop a routine, stick to the rules, and limit impulses (FOMO, greed, fear).
