RISK MANAGEMENT: CORE PRINCIPLES

Risk policy should set a maximum planned loss that fits the account's constraints and the trader's ability to tolerate drawdown. A stop does not guarantee the exact exit price, especially during gaps or fast markets, so planned risk and realized loss can differ. ILLUSTRATIVE DRAWDOWN MATH: Assume each losing trade reduces the remaining account equity by a fixed percentage, with no deposits, costs or other effects. After 10 consecutive losses: • At 10% of remaining equity per loss, equity is about 34.9% of the starting balance (about a 65.1% drawdown). • At 5%, equity is about 59.9% of the starting balance (about a 40.1% drawdown). • At 2%, equity is about 81.7% of the starting balance (about an 18.3% drawdown). • At 1%, equity is about 90.4% of the starting balance (about a 9.6% drawdown). The gain needed to recover from a drawdown is larger than the loss percentage: for example, recovering from a 40.1% drawdown requires roughly a 67% gain on the reduced balance. These are mathematical illustrations, not forecasts or recommended risk percentages; real results include varying outcomes, costs, slippage and possible gaps.

Position sizing is how you calculate exactly how many lots to trade based on your stop loss distance and account size. The Formula: Position Size = (Account Risk $) / (Stop Loss in Pips x Pip Value) Example: - Account: $10,000 - Risk per trade: 1% = $100 - Stop loss: 20 pips on EURUSD - Pip value: $10 per standard lot Position Size = $100 / (20 x $10) = 0.5 standard lots = 5 mini lots Never guess your position size. Always calculate it before entering the trade. Most trading platforms have position size calculators -- use them every single time.

The risk-reward ratio measures planned gain relative to planned loss. No single minimum ratio fits every strategy; the useful filter depends on the observed win rate, average win/loss, costs and drawdown. GROSS BREAK-EVEN EXAMPLES (BEFORE COSTS): • With +1R wins and -1R losses, the gross break-even win rate is 50%. • With +2R wins and -1R losses, it is about 33.3%. • With +3R wins and -1R losses, it is 25%. These are arithmetic examples assuming the stated average outcomes occur consistently; commissions, spread, slippage, partial exits and variation in realized R change the required win rate. Select and test the R:R filter against the full strategy rather than treating 1:3 or 1:2 as a universal gate.

Stops can define the price or condition that invalidates a setup, but they may fill at a worse price during gaps, low liquidity or fast markets. A stop order does not guarantee the amount lost. POSSIBLE STOP-PLACEMENT PROCESS: 1. Define the setup's invalidation condition using a rule that can be applied before the outcome. 2. Choose the stop level that represents that invalidation under the tested model. 3. Calculate position size from the stop distance, contract value, planned account risk and costs. 4. Review gap and slippage risk for the instrument and venue. A fixed pip distance may not fit every setup, but a structural stop also needs a written definition. Avoid moving stops farther away just to avoid realizing a loss, and avoid changing the stop distance merely to force a desired position size.

Some traders use circuit breakers to stop new entries after a pre-defined level of losses or repeated rule violations. Daily, weekly and monthly thresholds are personal or account-policy choices, not universal recommendations. When a limit is reached, follow the written review procedure: pause new risk, assess open positions according to the plan, review execution and costs, and resume only when your criteria are met. Three consecutive losses do not prove the bias is wrong or that market conditions have changed; inspect the trades against the model and compare with expected variance before deciding what to change.