A risk management framework is the backbone of every resilient trading operation. It defines how much you risk, where you exit, and how your positions interact with each other at the portfolio level. Without it, even profitable strategies eventually collide with the law of large numbers in the worst possible way.
Start by capping risk per trade as a fixed percentage of capital. Many professionals use 0.5–1.0% depending on their style. From there, translate that risk into position size based on your stop distance. Wider stops naturally mean smaller size so that the dollar risk stays constant.
Next, look at correlation. Multiple positions in highly correlated assets behave like a single oversized bet when volatility spikes. Group similar exposures—such as tech stocks, growth currencies, or high-beta crypto names—and cap the total risk you are willing to take across each bucket.
Finally, define clear rules for reducing risk when conditions deteriorate: maximum daily or weekly loss limits, rules for pausing after a string of losses, and guidelines for scaling back during regimes of elevated volatility. These pre-commitments protect you from making emotional decisions in the heat of the moment.