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Risk and trade management

He calls this the most important section of the course, and the arithmetic backs him up. A trade opened in the right place at the right moment still loses the account if the size and the exit are wrong.

Lesson 7 of 12. Almost every number on this page is his, and none of them has been rounded.

Three ways to lose the same account

He opens with a demonstration rather than an assertion. Take $1,000, assume every single trade is stopped out, and size it three different ways.

  • One per cent of the CURRENT balance each time. After 501 consecutive losing trades you still have $6.50 left. At the maximum daily risk that is around 500 trading days — roughly two years, since a year holds about 250.
  • A fixed one per cent of the STARTING balance — $10 every time. By the thirty-fourth trade that fixed $10 has become 1.5 per cent of what is left, and the account reaches zero in 102 trading days. Under a year.
  • Five per cent of the current balance. A third of the account is gone in under two weeks. It takes 135 days to reach zero, which is oddly longer than the fixed model — but by then the damage is done.
Three balance curves from the same starting capital: one per cent of the current balance, a fixed one per cent of the opening balance, and five per cent of the current balance
Same strategy, same losing run, same starting capital. The only variable is how the size was calculated, and it decides everything. Click to enlarge
Three columns of balances counting down from a thousand dollars under one per cent of the current balance, a fixed one per cent, and five per cent
The same losing run, three ways of sizing it — 501 trades, 102 trades and 135 trades to reach zero.

Which one to use, and when

His recommendations follow from the numbers rather than from taste.

The first is for beginners, and especially before trading real money. It is very low risk and it buys you more than two years of exposure to different market conditions — time to build experience and a trading psychology that holds up.

The second is for later. Compare the two and you find that by the time a third of the balance is gone, both have taken about the same number of trades. So once there is enough experience, a fixed one per cent of the initial balance is usable up to that point, and it removes a calculation from every trade.

The third fits nowhere. Five per cent a day is not just arithmetically worse — it puts enough psychological pressure on a new trader to end the attempt. And he is categorical about the limit: at no level, semi-professional or highly professional, does daily risk exceed 1.5 per cent.

Three limits sit above all of it, and they are not suggestions:

  • Daily risk — a maximum of 1 to 1.5 per cent.
  • Weekly risk — a maximum of 4 to 4.5 per cent.
  • Monthly risk — a maximum of 8 to 12 per cent.
  • And the rule attached to them: if you are more than 4 per cent down in a week, stay away from the market for at least a week. Use it to review the strategy and to recover psychologically — the point is to stop hasty decisions being made on top of losses.
Daily, weekly and monthly maximum risk shown as three bands of increasing size
Three ceilings and one instruction. The last one is the hardest to follow and the cheapest to obey. Click to enlarge
The daily, weekly and monthly maximum risk figures set out with the rule about stopping after a four per cent week
The three ceilings in his own words, with the instruction to leave the market for a week after a four per cent loss.

Turning a stop distance into a position size

The formula is his and it is worth having:

Required capital = ( pip value × stop in pips × lots ) + ( commission × lots )

Each term needs care. The pip value is per standard lot and has to be calculated separately at each broker, because it varies by broker and by instrument. The stop in pips is the actual distance — 10 pips on EUR/USD, 8 on something else, taken directly. The lot size is what you intend to open: 3 lots, 0.2, 0.5. Multiply those three and you have the gross cost of being stopped out. Then add the commission per lot times the number of lots.

Divide that total by your chosen risk percentage — 0.01 or 0.015 — and you have the capital the position requires. Or run it the other way to get the lot size a given account supports.

The relationship worth internalising: the shorter the stop, the larger the position that fits inside the same money. They are inversely proportional, which is why every earlier lesson worked so hard at getting the stop close.

His own warning sits under it: never choose a risk above one and a fifth per cent. Better to stay with the one per cent figure.

Ten trades with three winners, a stop against a target three times its size, and the win rate at which the account neither gains nor loses
Three definitions, and the third is the one that matters. Lower is better — it is the bar the strategy has to clear. Click to enlarge
The required capital formula broken into its terms, beside a table of lot sizes against the capital each needs
The formula with every term explained, and his worked table: the same risk at 1 lot needs ten thousand, at 0.03 it needs three hundred.

Win rate, risk to reward, breakeven

Three terms, defined precisely because the next section is arithmetic.

  • Win rate — winning positions as a percentage of all trades. A win rate of 30 per cent means that out of every 10 trades, 7 hit the stop and 3 reach the target.
  • Risk to reward — profit against the risk taken, as a number. A ratio of 3 means that for 10 pips of stop risked, 30 pips were gained.
  • Breakeven point — the minimum win rate at which the account, under your partial exit plan, neither gains nor loses. A breakeven of 30 per cent means at least 3 trades in 10 must work to avoid going backwards. The lower this number is, the better.
The breakeven win rate for closing everything at one to one, everything at one to two, and scaling out across one to two, three and four
Same entry, same stop, same strategy. Only the exit changed, and the bar halved. Click to enlarge

The exit matters more than the entry

Here is the demonstration, and it is the most useful page in the range. Take $35,000, a 10-pip stop, a pip value of $10, three lots, and $10 per lot in commission. Then vary only the exit:

  • Close everything at 1:1 — breakeven win rate 55 per cent.
  • Close everything at 1:2 — breakeven win rate 36.6 per cent.
  • Close one lot at 1:2, one at 1:3, one at 1:4 — breakeven win rate 27.5 per cent.
Five levers that reduce the win rate a strategy needs: longer final targets, fewer lots, profit protection, a tighter stop and better location
Five ways to lower the bar, and none of them requires being right more often. Click to enlarge
The breakeven formula worked through three exit scenarios giving 55 per cent, 36.6 per cent and 27.5 per cent
The arithmetic in full. Same entry and same stop; only the exit changes, and the required win rate halves.

What lowers the bar

Before the levers, a reality check he supplies himself: expecting a win rate of 80 or 90 per cent is not a realistic expectation of a market. Even 40 per cent is remarkable — and with risk management, exit strategy and a decent reward ratio, 40 per cent is comfortably profitable. He notes most professional traders run a win rate around 35 per cent.

Five things reduce the breakeven:

  • Run the winning lots further, especially the last one — pushing the third exit out to 60 or 70 pips. More profit means less need to be right.
  • Reduce the number of lots. Lower overall risk per trade lowers the win rate the account needs.
  • Protect what is made: move the stop to breakeven once a certain profit exists, and take partials at key points.
  • Set the stop from conditions and volatility rather than using a fixed number for every trade.
  • Enter where the probability is already better — at the strong levels the earlier lessons taught you to find.
A wide stop reaching a small multiple against a tight stop reaching a large one over the same distance of price
The same movement in the market, two very different results. The stop distance is the variable, not the market. Click to enlarge

What raises the reward

The other side of the same equation, and this is where he draws the line between an experienced trader and a new one. Five factors:

  • A strategy with a cheap stop. A 5 to 10 pip stop instead of 40 changes what the same movement is worth: 10 pips of stop reaching 80 is 1:8, where 40 reaching 80 is 1:2.
  • Timing. Fundamental knowledge pays here — the large moves happen inside the monetary cycles, and aligning with the economic calendar is what turns a normal trade into an unusual one.
  • Trade and trailing stop management. Protecting profit while staying in for a large move takes patience, and he warns specifically against trailing a stop into an area with fishing potential — see <a href="/education/volume-and-order-flow-analysis/stop-hunting">lesson six</a>.
  • Trading at the statistical and probability areas, which have the higher potential for movement in the first place.
  • Reading passive against aggressive. After a retrace, price may run to a fishing area on inconsistent delta and very low volume — recognising that lets you delay the second and third partial exits rather than taking them early. This is <a href="/education/volume-and-order-flow-analysis/order-book-tape-and-market-speed">lesson five</a> put to work.
One day's risk divided into two or into three separate positions rather than spent on a single trade
The day's risk is a budget, not a single bet. Being stopped out is unavoidable, so it has to be survivable. Click to enlarge

Splitting the daily risk

In the D-Trade style using TVVR, he reckons on about two good opportunities in a day — an average, so some days give one, some four, some none.

Which means the daily risk should be divided rather than spent. If it is $300, that is three positions of $100 or two of $150. His reasoning is not optimism about the strategy: it is that being stopped out is unavoidable, so the budget has to survive it.

There is a second limit and it is about people rather than arithmetic. Do not take more than four trades in a day, even scalping. Both winning and losing have a strong effect on judgement, and human decision-making degrades across a long session.

A two-lot exit against a three-lot exit, with the market condition each one suits
Their risk-to-reward comes out about equal at 2.64. What separates them is which market they are used in. Click to enlarge
The two lot and three lot models set out with their net risk, net profit and resulting breakeven percentages
Both models with the numbers behind them — and the note that their risk-to-reward comes out equal at about 2.64.
The two models drawn as entries with their stops and staged targets, and what happens after the first target
The same two models as a picture, with what happens to the remaining position after the first target is taken.

Two lots or three

Both models are worked through in full on the slides, and the interesting result is that their risk-to-reward comes out about the same — roughly 2.64 either way. So the choice is not about which is more profitable in the abstract.

It is about the market:

  • Quiet market, low volatility, shorter distances — use the two-lot model. He recommends it for beginners for the same reason.
  • Higher volatility, or larger movements expected — use the three-lot model, which has the room to keep something running.
Two rooms of different size holding the same ball, with the chance of a collision falling as the room grows
The argument in one picture. The ball never changes size; only the room does. Click to enlarge
A grid comparing R2 and R3 results across the 3-2, 3-3, 2-2 and 2-3 distributions, with and without moving the stop to breakeven
Every distribution compared side by side, with and without moving the stop to breakeven.
A wider grid of the same comparisons marking which distributions are low risk for a pyramid and which for a day trade
The same grid extended, with the rows he marks as low risk for a pyramid and for a day trade.

Why a bigger target is less likely

This is the part of the lesson that explains why all the machinery above is necessary, and it is an argument from geometry rather than from trading.

Put a ball in a room. Throw a second ball in at random. The chance they collide is the contact area of the balls against the area of the room. Keep the balls the same and make the room bigger, and the probability falls.

His mapping is direct: the room is the risk-to-reward. The larger the ratio you are reaching for, the lower the chance price gets there. Which means a high reward ratio is not free — you pay for it in probability, every time.

And that is precisely what the partial exit apparatus is for. Taking the first lot at 1:2 collects from a probable outcome; leaving the last lot running reaches for an improbable one. Neither alone is as good as both, and the breakeven arithmetic earlier on this page is what proves it.

A trend with a new position opened on each successive leg and every stop trailed beneath the newest structure
One position always left open, and the stops climbing behind it. Only ever on the primary daily movement. Click to enlarge
Two rooms of different size each holding one ball, illustrating that a larger room makes a collision less likely
His analogy, drawn: the ball is the same size in both rooms. Only the room changed.
A heat map of win rate against risk to reward with the risk distributions overlaid on it
The same argument as a grid — where the distributions sit against win rate and reward together.

Pyramiding

Pyramiding means adding to a position as it goes your way. He is careful to separate it from its opposite — scaling down, where size is added to a losing position to improve the average. That belongs to cash markets, not leveraged ones. Pyramiding adds while the profit grows, with the risk controlled.

It does not work everywhere. It is useless in a range. The conditions he names are significant economic crises, rising inflation, recessions, pandemics or regional crises beginning or ending — the events that produce trends lasting a year or more. Riding one of those is what the technique exists for.

The method, in his order:

  • Open a trade under the risk management above — but do not close it at R4.
  • Once a trend has formed, and if there is no fishing potential, move the stop of the last position below the hourly trend.
  • In the next trend, take another trade by the same rules, keep the previous position open, and once that trend forms, move both stops below it.
  • In this way one position stays open in every trend, and each one adds to the total.
  • Do not trail the stop below the daily correction range until a daily downtrend forms and the trend continues.
  • Build the pyramid only on the primary daily movement.
Profit from one trade split in half, part of it added to the next trade's risk, and the position size growing without the principal being risked more
Five trades, and the size doubles. The daily risk on the principal never moves — the growth comes out of profit. Click to enlarge
A long rising trend with successive entries marked and the stops trailed beneath each new structure
The schematic: an entry in each leg, one position always left open, and the stops moving up behind them.

The super pyramid

The last idea in the range, and it is compound interest applied to the pyramid.

He is upfront that compounding is easy in a spreadsheet and hard in a market, because the returns are not certain. So the version here is deliberately conservative.

The mechanism: take the profit from the first trade, divide it — by two or by three — and add one share of it to the next trade's risk allowance. Dividing by three carries less risk but grows more slowly; by two is faster. Do the same at each step, and by the fifth trade the position has roughly doubled — three lots to six — without the daily risk on the principal changing at all.

His framing is the important part: you are risking a portion of the profit, not the principal. The daily risk on the capital stays exactly where it was, which is what makes it defensible.

And his own closing caution, kept as he wrote it: this always carries the risk of losing the surplus.

Three panels: the daily ceiling, the exit deciding the breakeven, and profit rather than principal funding the growth
The three in the order they matter. The first one is the one that keeps the account alive long enough for the others to matter. Click to enlarge
A branching diagram showing profit from each trade halved and part of it added to the next trade's risk
Five trades with the profit compounding into the size — reaching six lots without the daily risk on the principal moving.

What to take from this one

Three things, in order of how much they matter:

  • One to 1.5 per cent a day, split across two or three trades, and never more than four trades in a day. He states plainly that no level of trader goes past that ceiling, and the three balance curves are why.
  • The exit sets the breakeven, not the entry. On the same trade with the same stop, scaling out across 1:2, 1:3 and 1:4 took the required win rate from 55 per cent down to 27.5. Nothing about the entry changed.
  • A larger reward is inherently less likely to be reached — that is geometry, not pessimism. So grow the size out of profit rather than principal, and buy the low breakeven with the exit plan instead of with hope.
Three balance curves from the same starting capital under three different sizing rules
Where the lesson started, and the reason for all of it: three ways to size the same losing run, and three completely different outcomes. Click to enlarge

Next: scalping with range bars

This lesson mentioned that other branches offer more opportunities in a day than TVVR does. Lesson eight is one of them — range bars, which close on movement rather than on the clock, and the aggressive data a scalp needs.

Back to the twelve lessons