← CHEATSHEETS

Risk Management & Exits

How to define stops, size positions, take profits, and survive catastrophic losses. The difference between trading and gambling.

🛡️ THE 3 NON-NEGOTIABLE RULES

Before every single trade, you must:

  1. 1.Define your stop loss price (where you're wrong)
  2. 2.Calculate your position size (so a loss = 1% of account, not 10%)
  3. 3.Confirm portfolio heat is under 5% (total risk across all open trades)

Break any of these and you're gambling, not trading.

📐 COMPLETE TRADE EXAMPLE

Account: $10,000  |  Risk per trade: 1% ($100)  |  Asset: BTC

Step 1 — Define Stop

BTC at $45,000, support at $42,750. Stop = $42,750 (5% below entry)

Step 2 — Position Size

Risk $100 / Stop distance 5% = $2,000 position (0.044 BTC)

Step 3 — Take Profit

2:1 R:R → Target = $49,500 (10% above entry)

Step 4 — Portfolio Heat

This trade risks 1%. Other open trades risk 2.5%. Total heat = 3.5% ✓

Step 5 — Execute

Set limit buy at $45,000, stop-loss at $42,750, take-profit at $49,500

If Stopped Out

You lose $100 (1% of account). You can take 10 more consecutive losses before losing 10%.

If Target Hit

You gain $200 (2% of account). You only needed to win 33% of trades to break even.

The Golden Rule

You must know your stop loss before you enter. If you can't define a logical stop, the setup isn't tradeable. Most traders lose because they define their stop AFTER they're emotionally attached to being right.

Risk management isn't about maximizing wins — it's about staying in the game long enough to accumulate edge. Blow up your account on one bad trade, and years of work are gone. Protect capital first. Profits are a byproduct.

Four Stop-Loss Placement Methods

Each has strengths. Learn all four. Use the one that makes sense for your setup.

ATR-Based Stop Loss

Entry ± (ATR × Multiplier)

Example

Entry: $50, ATR(14): $2, Multiplier: 2 → Stop: $46 (shorts $54)

Rules

  • •14-period ATR is standard; adjust for volatility regime
  • •Multiplier 1.5–3× depending on timeframe (lower = tighter, higher = looser)
  • •Works best on momentum entries; adapts to changing volatility
  • •Avoid ATR stops at key support/resistance — they may snap you out

Best For

Momentum breakouts · Intraday swings · High-volatility pairs

Support/Resistance Stop Loss

Below nearest swing low (shorts: above swing high)

Example

Buying at $50 with prior swing low at $46.50 → Stop: $46.25

Rules

  • •Most logical stop placement: price breaks this level = setup failed
  • •Often coincides with supply/demand imbalance
  • •Ideal for pattern trades (Head & Shoulders, triangles, etc.)
  • •Risk is clear: if price breaks here, the bias is wrong

Best For

Pattern trades · Reversal entries · Technical level breaks

Percentage Stop Loss

Entry × (1 ± Risk%)

Example

Entry: $100, Risk 3% → Stop: $97 (shorts: $103)

Rules

  • •Simplest method; works on any timeframe
  • •Typical ranges: 2–5% for swing trades, 0.5–2% for day trades
  • •Ignores volatility — use with caution in high-IV environments
  • •Best paired with position size adjustment for risk parity

Best For

Index/stock trading · Consistent risk per trade · Simple setups

Volatility-Adjusted Stop Loss

Entry ± (20-Day Historical Vol × 2)

Example

20-day HV: 8%, Entry: $100 → Stop: $84–$116 (±16%)

Rules

  • •Accounts for regime changes (quiet vs. volatile periods)
  • •Widen stops in high-volatility regimes (avoid whipsaws)
  • •Tighten stops when vol is low (higher probability entries)
  • •Use Bollinger Bands or Keltner Channels as visual reference

Best For

Crypto/binary outcomes · Earnings/event trades · Regime-adaptive

Four Profit-Taking Strategies

The exit is more important than the entry. A perfect entry with a bad exit = breakeven or loss.

Fixed R:R Targets

Risk $100 → Target $200 (2:1 R:R)

  • ▸Exit entire position when 2:1 R:R is reached
  • ▸Guarantees positive expectancy even at 50% win rate
  • ▸Simple, mechanical, removes emotion
  • ▸Downside: leaves money on the table in extended trends

Scaling Out (1/3 / 2/3 / 3/3)

Sell 1/3 at 1:1 R:R, 1/3 at 2:1 R:R, trail stop on final 1/3

  • ▸Lock in profit early while letting winners run
  • ▸Psychologically easier: you've already won on 2/3
  • ▸Final 1/3 on trailing stop captures mega-moves
  • ▸Ideal for breakout trades and momentum setups

Trailing Stop (X% or X points)

Up 15%, then set trailing stop at 5% below peak

  • ▸Lets profit run; exits on first serious pullback
  • ▸Best for strong trends; avoid choppy consolidations
  • ▸Use 2–5% trail on 4h+, 1–3% on intraday
  • ▸Can be gamed by market makers — pair with levels

Target Then Trail (Two-Phase Exit)

Sell at 1.5:1 R:R, trail remaining 50% at 3% below peak

  • ▸Best of both worlds: capture core profit, then trend-follow
  • ▸Removes early exit regret while protecting upside
  • ▸Requires monitoring post-target
  • ▸Works on any timeframe

Position Sizing Formulas

Position size is the primary lever for managing risk. Stop loss tells you how much you lose; position size tells you HOW MUCH.

Fixed Risk Dollar Amount

#FF3B3B

Position Size = Risk $ / (Entry − Stop)

Example: Risk $100, Entry $50, Stop $48 → Position: $5,000 (100 shares)

  • ✓Simple and professional; keeps risk consistent
  • ✓Ideal for accounts under $50k
  • ✓Risk any trade is identical; win/loss size scales with R:R

Percentage of Account

#FF3B3B

Risk% = Account Size × 1–2% / (Entry − Stop)

Example: $100k account, risk 1.5%, Entry $50, Stop $48 → Risk $1,500

  • ✓Account grows/shrinks with position size
  • ✓Matches institutional money management
  • ✓Prevents overleveraging as account grows
  • ✓Standard: never risk >1–2% per trade, max 5–6% portfolio heat

Conviction-Scaled Sizing (InDecision Method)

#00D4FF

Base Size × Conviction Factor (InDecision score 1–10)

Example: Base position 1% risk; if score 9/10 → 1.5% risk; if score 4/10 → 0.5% risk

  • ✓Scale size proportional to setup quality
  • ✓High-conviction (9–10): 1.25–1.5× base
  • ✓Medium (5–8): 1.0× base
  • ✓Low (1–4): 0.25–0.5× base
  • ✓Maximizes expected value over time

Kelly Criterion (Advanced)

#8B5CF6

Optimal % = (Win% × Avg Win − Loss% × Avg Loss) / Avg Win

Example: 60% wins, 1.5:1 R:R → Optimal risk: 2.4% per trade

  • ✓Theoretical maximum growth rate
  • ✓Requires 30+ trade history for accuracy
  • ✓Often too aggressive; use 50% of Kelly for safety
  • ✓Recalculate quarterly as stats change

Calculate your exact position size with our interactive tool →

Portfolio Heat Rules (Total Risk %)

The sum of all open position risks must never exceed your portfolio heat limit. This is the circuit breaker that prevents ruin.

Safe Zone

0–3%

All setups acceptable. Take full positions.

Caution Zone

3–5%

Raise bar for entry quality. Reduce conviction scaling.

Red Zone

5–7%

Only highest-conviction trades. Size down 50%. Tighten stops.

Lockdown

7%+

STOP TRADING. Close weakest position or wait for win. Protect capital.

How to Calculate Portfolio Heat

Total Risk = (Trade 1 Risk) + (Trade 2 Risk) + (Trade 3 Risk). Example: 3 trades risking 1.5%, 1%, and 0.5% = 3% total heat (Safe Zone).

Five Cognitive Traps That Kill Accounts

Even with perfect rules, emotion overrides logic. Recognize these patterns before they cost you.

Revenge Trading (after a loss)

Symptom

You lost 2%, now risking 5% on the next trade to 'get even'

Fix

Set daily loss limit (e.g., 3% = walk away). Sleep on it. Risk resets tomorrow.

Stop-Loss Paranoia (moving stops too tight)

Symptom

You enter, then immediately move stop to breakeven, then get stopped out for a small loss

Fix

Define stop BEFORE entry. Write it down. Don't touch it unless new information emerges.

Profit-Taking Too Early (cutting winners short)

Symptom

You exit at 1:1 R:R, then watch it go 3:1 R:R while you're on the sidelines

Fix

Use scaling or trailing stops. Allow at least 2:1 R:R before taking core profit.

Averaging Down (doubling down on losers)

Symptom

You're down 2%, add another 1% position, now down 3%, add more...

Fix

Never add to a losing position without a PLAN. In most cases, just cut it.

Ignoring Portfolio Heat (too many open positions)

Symptom

3 concurrent trades risking 2% each = 6% portfolio heat, then one stop-loss ruins you

Fix

Track total portfolio risk in real-time. Hard cap at 5%. Close weakest trade if over.

Quick Reference Checklist

Before Entry

  • ✓ Define stop loss (logical level)
  • ✓ Calculate risk $ (1-2% max)
  • ✓ Calculate position size
  • ✓ Confirm portfolio heat <5%
  • ✓ Set profit target (2:1 R:R min)

During Trade

  • ✓ Monitor portfolio heat
  • ✓ Don't move stop closer
  • ✓ Trail stop if trending up
  • ✓ Scale out at targets
  • ✓ Cut losers immediately

For leveraged trading risk rules, see the Leverage Handbook →

Margin requirements, liquidation math, and leverage-specific position sizing

← Back to Cheatsheets