Beginner–Intermediate12–18 minLesson 4
Risk Management and Drawdown Math
Preserve capital first: position sizing, loss limits, drawdown/recovery math, diversification, and protections against extremes.
Lesson Progress0%
4.1. Position Sizing and Risk Budget
Keep per-trade risk small (0.25–1%). Define daily/weekly loss stops and stop-trading rules.
Size positions from risk, not from 'confidence'.
Position Sizing Calculator
$
30 pips
2%
5%
Results
Dollar Risk:$100.00
Lot Size:0.33 lots
Max Trades/Day:2
Daily/weekly stops: after limit is hit — stop trading for that period.
4.2. Drawdown & Recovery Math
Drawdowns are inevitable. Recovery grows non-linearly: after −20% you need +25% to recover; after −50% you need +100%.
−10%
Drawdown
+11.1%
To Recover
−20%
Drawdown
+25%
To Recover
−30%
Drawdown
+42.9%
To Recover
−50%
Drawdown
+100%
To Recover
Recovery Calculator
−15%
3%/mo
Recovery Required
To Break Even:+17.6%
Est. Months:6
Target smaller DDs via lower risk per trade and trading halts.
4.3. Correlation and Diversification
Uncorrelated systems reduce portfolio swings. Combining edges across instruments/timeframes can lower drawdown.
Diversification Calculator
10%
0.3
Range: -0.5 (inverse) to 0.9 (highly correlated)
Portfolio Volatility
8.1%
Lower correlation → lower portfolio DD for same individual risks.
Combine different regimes (trend + range) and symbols to avoid synchronized losses.
4.4. Protections Against Extremes
Define circuit breakers and execution guards to avoid bad market conditions.
Protection Policy Configurator
Low:20th
High:80th
1 pip(s)
Before:min
After:min
After:losses
Cooldown:
Policy Summary
- • Volatility: Trade only when ATR(14) is between 20th–80th percentile.
- • Spread: Max 1.5x median spread.
- • Slippage: Max 1 pip(s) allowed.
- • News: Pause 15 min before and 15 min after high-impact news.
- • Loss Streak: Pause after 3 consecutive losses, cooldown: 4h.
4.5. Practice: Build Your Personal Risk Plan
Lesson 4 Quiz
Lesson 4 Quiz
Test your understanding with 3 questions. Pass with 2/3 correct.
Educational content only. Not financial advice. Trading involves risk of capital loss. Past performance does not guarantee future results.