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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.

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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.
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