Block 05 · 01
Risk Management
Rules that protect an account: cash reserves, position sizing, and a 30% margin limit with leverage in mind.
Position size is defined not by the amount of capital, but by how much of that capital a person is willing to lose if the stop-loss is hit.
- Step 1 · Capital at risk
$10,000 × 2% = $200 — the maximum you lose if price reaches the stop-loss.
- Step 2 · Risk per share
$100 − $95 = $5 — this is what each share costs you if the stop is hit.
- Step 3 · Position size
$200 ÷ $5 = 40 shares.
40 shares
Move the stop-loss and the position size moves with it: the wider the stop, the fewer shares fit inside the same allowed risk.
Educational example. Not investment advice.
In plain words
This is how a fund manager operates. They have $500,000 of working capital. They don't put the whole sum into one idea — they spread it across eight positions of roughly $40,000 each and keep about 35% of the account free. A month later, a quarterly report comes out for a company on their watch list: revenue beats consensus, guidance is raised, and the price sits in an attractive zone. They have something to act on right away, that same day. A free balance isn't idle capital — it's the ability to enter the best idea of the month the moment it appears.
Capital management means setting distribution rules in advance. These rules are what turn a series of individual trades into a systematic process.
Rule one: is kept separate. A specific amount is set aside for the market, and you manage it freely. The rest of your money lives its own life and stays out of play.
Rule two: capital is spread across ideas. A single position takes up a limited share of the account, typically up to 5-10%. That way, you always have a to enter the next opportunity when it appears.
Rule three: the free balance is a resource. Professionals keep part of their capital uncommitted not out of caution, but because the best entry points appear suddenly, and only someone with free funds can act on them.
Rule four: a plan for every trade. Size, entry level, target, and horizon are agreed with your specialist before you open a position. That's what makes the outcome manageable.
Common beginner mistakes
- Putting the whole account into one idea — leaving no resource for the next opportunity
- Sizing a position based on mood rather than account size
- Opening a position without a preset target and horizon
- Not locking in part of the profit — the base for new ideas doesn't grow