So in this section you will learn number one: what is risk management and why it matters number two: what is position sizing and, finally, how to calculate your position size such that you never blow up blow up. Another trading account so this topic that i'm about to share with you is very important right, so pay close attention so, first and foremost, what is risk management. So, if you ask me, risk management is the ability, as a trader, to encounter a series of losses right and not blow up your trading account. So, for example, even if you sustain a series of 10 losses in a row, your trading account should be pretty much still intact.

Yes, you have a bit of a losses along the way, but that account right should still have still have most of the money intact. So that's what risk management is all about. So it's important because you can have a winning trading strategy, but without proper risk management right you will still end up a losing trader. I can guarantee it.

So let me share with you an example. So you know what i mean so, let's say, for example, there are two traders, john and sally, and they both have a 1 000 trading account to start with. Their trading strategy has a 50 winning rate, so this means they win half the time and a one to two risk reward ratio. So let me explain what risk reward ratio is so, let's say, for example, you risk 100 on a trade.

Okay, that's the amount of money that you're willing to lose on a particular trade and the outcome for you is favorable. Instead of losing hundred dollars right, the market went in your favor and you made a profit of 200, so in other words, this 200 right is two times the amount that you had intended to risk initially. So this is what we call a one to two risk reward ratio. Your reward right is two times your initial risk.

So another example: let's say you have a 500 risk on the trade and instead of you know, losing the 500 market went your favor and you made five thousand dollars in state. What is the risk to reward ratio on this trade? This is a risk to reward ratio of a one to ten. You were risking at five hundred dollars and you made five thousand dollars at the end of it. So this is a risk reward ratio of one to ten next john risks, 250 per trade and sally risk 20 per trade - and let's say the outcome of the trades for both of them - is in this sequence: right l stands for losing right, lose lose, lose lose 10, win: win, win win so now.

What is the outcome for both traders? Let's look at john. You can see for jon. He loses 250 because the first trade is a loser loses another 250, another 250, another 250, and then he blew up so before he could. Even smell the winner, he lost his entire trading account.

On the other hand, let's have a look at sally, as you can see, sally goes through the same, losing streak right. She lose 20, lose 20, lose 20 lose 20 and then she made 40 40, 40 and 40, because these were the string of winners at the end. But why 40 again? Because we have a one to two risk: reward ratio right for their trading strategy. So if sally risked 20 on each trade and if the market, or rather if she achieves a one to two race reward ratio, this means a profit is two times the initial risk.

So two times of 20 is 40, so this is how we get 40 and at the end of it, sally made a total return of eighty dollars. So that's about eight percent gain on her account, whereas you look at john, he actually lost 100 of his account. So hopefully, right using this simple example, you can see the importance of risk management right in this case, both traders. They are trading with a winning strategy, but because of risk management, one of them loses his entire account and the other one is actually.

You know um making some money right from trading the markets, so this is important. It's another question. You might be thinking, okay right now, i get it right. Risk management is important, but how do i manage my risk? You know how do i make sure that every time i put on a trade right, i don't lose everything and more.

So this is where the next topic comes into play position sizing. So what is position sizing so position? Sizing is simply like trading. The right number of units right such that, even if a trade ends up being a loser, it's only a fraction of your trading account. Okay, let me repeat once again right position.

Sizing is knowing right how many units you should trade such that, if that trade goes against you, you only lose a fraction of your trading account and, as a general guideline, i usually advocate right not to lose more than one percent of your trading account on each Trade, so, for example, let's say if your account is like a ten thousand dollars trading account. One percent of ten thousand is a hundred dollars, so this means every trade you put on. You should not lose more than one hundred dollars on each trade and now brings us to the question right. How do we, you know calculate that in such a manner where you know you know, you won't lose more than 100 on each trade.

So to do that, you need to know a few things okay, so this is kind of like the secret formula right, so position size is equals to the amount to risk right. The amount of uh dollar that you're willing to risk divided by a stop loss, multiplied by value per pip, so amount to risk is usually. I recommend one percent risk on each trade. Some some traders will go with two or three percent uh.

That's pretty much. You know up to an individual trader and after which you divide it by your stop loss, multiplied by your value per bit. So i'm going to share with you a very simple uh way to do this. Okay, you don't have to so i'll.

Just go with you! A manual way and after which i show you how to do with a faster way, so, let's say you're, risking 100 you're willing to raise dollars - and let's say you know, your stop-loss is let's say: 100 pips, okay, so you put 100 and your value per pip Right, let's say your trading euro usd is uh 10 per bit for a standard lot. So you put your 10 okay, you plug in the numbers. You get 100 divide by a thousand, and if you do it, you end up with 0.1 standard lot, which is equivalent to one mini lot. So the trouble with this is that your value per bit is constantly changing.

It really depends on the code currency. It depends on the account funding that you have funded with with your account, so you can see that you know things can get really cumbersome right. So one thing i suggest is to use a position sizing calculator to make your life really easy, and i'm going to show you how to do this step by step. So you can google, you know, position sizing calculator, and this is one that i've found.

You can. You know, use it, it's free. So let's say you're trading again euro usd your account currency. Let's say it's in us dollar.

Let's say your account. Size is like what i said earlier: ten thousand dollars and your risk on each trade. Let's say it's one percent. You can probably have one percent in this case you ever switch to you know, dollar terms.

Let's say you want to risk a hundred dollars, which is also one percent. That is fine as well, but in this case let's go with the percentage, let's say one percent: let's say your stop loss in peeps right, it's 100 pips put in 100 contract size. Let's leave it at hundred thousand, which is equal to one standard. Lot, click calculate and there you have it right, tells you the lots to trade is 0.1, which is equals to 0.1 standard lot or one mini log.

Can you see how fast this is? Let's do another example: let's say this time: around you're, not trading euro usd you're trading pound against the aussie. Let's say your account: currency is in new zealand dollars. Okay and let's say this time: you're a baller, your account size is hundred thousand dollars and you're a baller, and you still risk one percent on this trade. Well done, then, let's say your stop-loss: this time around is 350 pips contract size again hundred thousand.

You click calculate. It will tell you how many units to trade right such that. If even if the trade hits your stop loss, you will only lose one percent of your account. So you click calculate, and in this case it tells you that you can trade 0.263 standard lot, which is about 26 uh, sorry, uh, 2.63 mini lots makes sense.

So again, this is very useful. So again, let's you know interpret this together. So this means right for this particular pound or z, trade, and, let's say your account - is in new zealand dollars and you're risking one percent of this hundred thousand dollars. This means right if the trade goes against you right with a stop loss of 350 pips right.

You will lose right: a thousand dollars thousand new zealand dollars right in your trading account, which is the one percent that we have defined over here right, and this is the position size that you should be trading with. 2.6 mini lots; okay, it makes sense. So this is how you use a position: sizing calculator. So, okay, let's do one more example.

So you really understand this big time. So let's say this camera. We do something simple, like aussie dollar, you want to trade, the aussie against the us dollar. Let's say your account: currency is in aussie how about that same uh just put aussie dollar.

Let's say your account size this time around is five thousand dollars and let's say you are risking a little bit more two percent risk on each trade which is still about uh hundred dollars. So your stop-loss, this time around - let's say it's only 50 pips, okay contract size, again hundred thousand units. So now the question is how many units right? Should you be trading such that? If this trade goes against you and hit your 50 pip loss, the loss of on this trade is only two percent of your account. Two percent of this five thousand dollars, five thousand aussie dollars click calculate, and it tells you that you should only be trading.

One point: five: three mini lots, make sense. Okay, so don't worry i'll share with you, uh uh, we'll talk more about. You know position sizing risk management with chart examples later on, but for now i just want you to to know how to use this very useful calculator. Just click, google.

There are many free available ones and just pick whichever that you know you're comfortable with. So, let's do a quick recap: number one position: sizing is the tool to manage your risk and use a position, a position, sizing calculator right to make your life easier. I don't expect you to manually, you know calculate it. Most brokers usually have a inbuilt calculator function.

If it doesn't have right, then just you know you go to any of the free website via google and you can use the calculator to help. You calculate the number of units to trade such that you know. Even if the trade is a losing trade right, you only lose a fraction of your account. You.