RISK MANAGEMENT FUNDAMENTALS

Risk management determines how a strategy's outcomes affect account survival. Fixed rules and numerical examples are useful only when their assumptions are stated; unsupported percentages are not a substitute for calculation. RISK-OF-RUIN ESTIMATES: There is no universal probability of ruin based only on a stated risk percentage and win rate. Any estimate depends on starting capital, win/loss distribution, sequence of outcomes, costs, slippage, stake size and the definition of ruin. A simulation should state its assumptions and use representative results. BREAK-EVEN WIN RATE: If average winners are +3R and average losses are -1R, the gross break-even win rate is 25% before costs: 0.25 × 3R offsets 0.75 × 1R. Changing risk from 1% to 5% changes the dollar size of wins and losses, but does not by itself change the break-even win rate when the payoff ratio is unchanged. Costs and different average outcomes change the calculation. THE PSYCHOLOGICAL IMPACT: Losing 20% of your account requires a 25% gain just to break even. Losing 50% requires a 100% gain. The deeper the drawdown, the harder the recovery.

An example risk ceiling is a personal or account policy, not a universal ICT rule. Choose a maximum planned loss that fits the account's limits, the tested strategy and your risk capacity. CALCULATING POSITION SIZE (HYPOTHETICAL EXAMPLE): Account balance: $10,000 Chosen planned risk cap: 1% = $100 Stop distance: 20 pips Assumed pip value: $10 per pip for one standard lot Position size: $100 / (20 pips × $10 per pip) = 0.5 standard lots (equivalent to 5 mini lots) before costs and slippage. Actual position sizing depends on contract specifications, account currency, pip/tick value, stop distance, commissions, spread and expected slippage. Smaller risk allocations may be appropriate while testing or in volatile conditions, but a past win rate or a winning streak alone does not justify increasing size. Set daily or weekly pause limits in advance and review aggregate exposure across correlated positions.

The risk-to-reward ratio compares the planned loss at the stop with the planned gain at the target. There is no universal minimum ratio for every strategy; a high ratio does not automatically compensate for a poor win rate, costs or inconsistent execution. GROSS BREAK-EVEN EXAMPLES (BEFORE COSTS): • 1:1 planned payoff: 50% win rate to break even. • 1:2 planned payoff: about 33.3% win rate to break even. • 1:3 planned payoff: 25% win rate to break even. • 1:5 planned payoff: about 16.7% win rate to break even. These figures assume fixed average wins/losses at the stated ratio, with no fees, slippage or partial exits. Real results can differ. OBs, FVGs, sweeps and dealing ranges can be used to define entry, stop and target hypotheses, but they do not ensure tight stops or profitable high-R:R trades. HYPOTHETICAL EXAMPLE: If planned risk is $100 and the target yields +4R when reached, the planned ratio is 1:4. A sequence with one +4R winner and three -1R losses nets +1R before trading costs; that is arithmetic, not evidence that a setup will produce those outcomes.

Where you place your stop loss is as important as where you enter. A poorly placed stop can expose a trade to ordinary volatility, spread, slippage or a stop that does not match the setup. A chart alone cannot establish that an algorithm deliberately targeted the stop. THE GOLDEN RULE: Your stop loss should be placed at a level where, if hit, your trade idea is proven wrong. Not at a random number. Not at a fixed pip distance. At the structural level that invalidates your setup. STOP LOSS RULES BY SETUP: Order Block Entry: - Bullish OB: Stop below the OB low (plus 2-3 pips buffer) - Bearish OB: Stop above the OB high (plus 2-3 pips buffer) Fair Value Gap Entry: - Bullish FVG: Stop below the FVG (the low of the first candle) - Bearish FVG: Stop above the FVG (the high of the first candle) Liquidity Sweep Entry: - Stop below the sweep low (bullish) or above the sweep high (bearish) BUFFER AND EXECUTION: If a buffer is part of your tested setup, define it using the instrument, volatility and execution conditions. A fixed 2-5 pip buffer does not suit every market; more distance can increase planned loss unless position size is adjusted. A buffer cannot guarantee that a trade will avoid a stop-out or that a setup is still valid.

Some traders set daily, weekly or monthly loss limits as a circuit breaker. Choose thresholds in advance to fit your account constraints and strategy; there is no universal 3% daily, 6% weekly or 10% monthly rule. A PAUSE RULE: If a pre-set loss limit or repeated rule violation is reached, pause new entries and review the data before resuming. Three consecutive losses alone do not prove that your bias is wrong or the market has changed; check whether each trade followed the model and whether results fit its expected distribution. Likewise, a winning streak by itself is not a reason to increase or cut risk. Avoid changing size based only on short-term outcomes.