Risk Management & Position Sizing Hub
- FinancialWisdom
- 1 day ago
- 4 min read
Master the Trading Skill That Determines Long-Term Survival
Introduction
Risk management is the core skill that separates long-term traders from those who quickly burn out. While strategies, indicators, and chart patterns often get the most attention, the real edge in trading comes from how effectively you control losses, size your positions, and manage variance over time. This hub brings together the most important lessons on risk, money management, trade sizing, expectancy, and capital protection so you can build a framework that keeps you in the game long enough to let your strategy edge work.
Take my equity curve for example. Updated Dec 2025
Get my FREE strategy and follow my trades here - My E-Book / Breakout Strategy
You will notice many periods of lacklustre performance, such periods will be in almost anyones approach, with perhaps the only variance being timespan.
The point here is that proper risk management (and Mindset of course) will allow you to see through the periods where the markets have not been conducive to your approach. Without solid risk management these flat periods could easily wipe an account, especiallly with excessive Leverage.
Risk / Reward Ratio
When in comes to trading in particular the Risk to Reward ratio holds significant importance, it allows the trader to predetermine their risk relative to thier targetted reward, so the Risk portion of the ratio is key for this topic.
Check out this video for a better understanding of the ratio and how professional traders like myself apply it. - RISK REWARD RATIO
Broad Indicators
Other than risk management at a singular trade level, we can also apply risk management from a broader perspective. These two videos show that by using the broader indicators like the MACD or EMA crossovers, we can ensure we are only trading in the direction of the broader market.
How to limit or even avoid drawdowns - Avoiding Drawdown
The indicator I apply to my trading strategy (as per equity curve above) to determine the longer term trend direction is the EMA crossover strategy. For a more detailed explanation see this blog post:
Position Sizing
Position sizing determines how much capital you risk on each trade and is the foundation of long-term survival. By controlling exposure relative to account size and volatility, traders reduce drawdowns, avoid catastrophic losses, and allow winning strategies to perform. Proper sizing creates consistency, discipline, and controlled risk. Finding the optimal position size is key to minimise losses and maximise gains, I use the Kelly Criterion method for this exact reason.
Kelly Criterion Position Sizing Video:
Expectancy & Risk Of Ruin
Expectancy measures the long-term profitability of a trading strategy, while risk of ruin calculates the probability of blowing an account. Together they reveal whether a strategy can survive real-world variance. High expectancy with controlled risk per trade reduces drawdowns, protects capital, and keeps traders in the game long enough for edge to play out.
One of our best videos to explain its importance comes from Dr Van Tharp and his book Trade Your Way To Financial Freedom:
Trade Management
Trade management is the process of actively controlling a position after entry—adjusting stops, scaling in or out, reducing size during volatility, and locking in profits. Good trade management protects capital, maximises winners, and limits losers. It transforms a strategy from theoretical edge into consistent, real-world performance.
Following on from Dr Tharps video above, this video explains how managing a trade correctly can allow for your positive expectancy to unfold.
Trade Management Video - Trade Strategies that Maximize Gains & Minimize Risk
Stop Loss Size
Stop-losses protect traders from excessive losses by defining the maximum acceptable risk before entering a trade. Whether based on price structure, volatility, or fixed percentages, stop-losses enforce discipline, prevent catastrophic drawdowns, and ensure no single trade damages long-term performance. They are the foundation of professional risk management.
The question is, what is the most optimal position size percentage?
In this study not only compares stop losses to buy and hold but also the optimal stop loss percentage:
Another blog post detailing the importance of a stop loss in stock trading can be seen here - Stop Losses In A Trading Strategy
Averaging Down Vs Stop Losses
Averaging down adds more size as price moves against you, increasing risk and emotional stress. Stop-losses do the opposite: they cut losing trades at a predefined level and protect your capital. Long term, disciplined stop-loss use massively outperforms averaging down for most traders, especially in trending or crashing markets.
This video compares both approaches - Averaging Down vs Stop Loss?
Progressive Exposure
Another risk management concept is progressive exposure which means increasing your risk only as your trading proves itself. You start with small position sizes, then gradually scale up after a series of well-executed trades or new equity highs. This reduces the impact of early mistakes, protects against drawdowns, and lets your account “earn the right” to take on more risk.
In this video you can clearly see the impact of incorporating such an approach into your trading :
Ultimately, risk management is what keeps traders in the game long enough for skill, strategy, and experience to compound. By controlling position size, defining risk per trade, respecting stop-losses, and understanding expectancy, traders protect their capital and stabilise performance. Mastering risk isn’t optional—it’s the foundation on which every successful trading career is built.
That is exactly how I built my approach over the last 30 years. To understand my approach better you can access my FREE E-Book with all the details here.
I hope you find value!
Further resources:
The Ultimate Trading Guide – Complete Trading Guide for All Skill Levels
VWAP Indicator – Maximum Trading Gains Using Price, Time & Volume
MACD-V Indicator – Normalizing Momentum by Volatility
Trade Like a Casino – How to Trade Stocks Using Probability & Edge
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