Risk Rules in Plain English

Most trading guides explain risk with a wall of formulas and a stock photo of a man pointing at a chart. We’re going to skip both.

There are four settings that do almost all the work of keeping you safe. Understand these and the rest is detail.

1. Capital: the money it’s allowed to use

Before any trade happens, you decide how much an automation can use in total. This is its capital.

It’s the outermost fence. Everything else in this article happens inside it. If you give an automation $200, its trades are sized from that $200, and it can never lose more than that $200, no matter what the other settings say.

Plain-English version: “This is the most this automation is ever allowed to cost me.”

2. Stop-loss: when to give up on a trade

A stop-loss closes a trade once it has lost a set amount. For example, “close the trade if the price falls 3% below where I bought”.

It’s the most important habit in trading, and also the one people most love to turn off “just this once”. Please don’t. A trade without a stop-loss is a trade that has decided to find out how low things can go.

Plain-English version: “If I’m wrong by this much, I’d rather be out than hopeful.”

3. Position size: how big each trade is

Position size is how much each trade puts to work. The sensible way to set it is backwards from your stop-loss.

Say your capital is $1,000 and you’re comfortable losing 1% of it on any single trade, which is $10. If your stop-loss is 5% below the entry price, the trade can be about $200 in size, because 5% of $200 is $10. Tighter stop-loss, bigger trade. Wider stop-loss, smaller trade. The amount at risk stays the same.

TradeFIQ does this arithmetic for you from your risk profile. You just decide the “1%”.

Plain-English version: “However this trade ends, a loss should cost me about the same amount.”

4. Daily loss limit: the circuit breaker

Some days just aren’t your strategy’s day. A daily loss limit stops new trades once the automation has lost a set percentage of its capital in one day.

This matters more than it sounds. Losing streaks cluster. The day you lose three trades in a row is statistically a day you’re more likely to lose a fourth, because the market is probably in a mood your strategy doesn’t suit. The limit gives everyone, including you, a cooling-off period.

Plain-English version: “If today is going badly, stop digging.”

How they fit together

Picture a set of nested boxes:

• Capital is the big box: the most the automation can ever use or lose.
• The daily loss limit is a smaller box inside it: the most it can lose in one day.
• Position size and stop-loss together make the smallest box: the most any single trade can lose.

If every box is sized sensibly, a bad trade is annoying, a bad day is disappointing, and nothing is ever a disaster.

A starter setup that won’t embarrass you

If you want somewhere to begin, this is a reasonable, deliberately boring starting point:

• Capital: an amount you’d genuinely be fine losing while you learn
• Risk per trade: 1% of capital
• Stop-loss: set by the strategy, but always set
• Daily loss limit: 3% of capital
• Maximum open trades: 2 or 3

Boring is the goal here. Exciting risk settings make for great stories and terrible account balances. There’s a reason nobody brags about their seatbelt.

Once you’ve watched this run for a while, adjust one setting at a time and see what changes. Changing five things at once and hoping for the best is how bugs get made, in software and in trading.

For more detail on every setting in the risk profile, see our full guide to risk management.