> For the complete documentation index, see [llms.txt](https://sigm-algo.gitbook.io/sigma-algo-docs/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://sigm-algo.gitbook.io/sigma-algo-docs/trading-101-fundamentals/risk-management.md). # Risk Management **Importance of Risk Management** Risk management protects your capital and ensures long-term trading sustainability. It involves identifying, assessing, and prioritizing risks followed by application of resources to minimize and control the probability of unfortunate events. **Position Sizing** * **Risk Per Trade:** Decide the percentage of your capital you're willing to risk on a single trade (commonly 1-2%). * **Calculating Position Size:** Use your risk per trade and the distance to your stop-loss to determine the number of units to trade. **Stop-Loss and Take-Profit Orders** * **Stop-Loss Orders:** Automatically close a position at a predetermined price to limit losses. * **Take-Profit Orders:** Automatically close a position when it reaches a certain profit level. * **Setting Levels:** Base your stop-loss and take-profit levels on technical analysis, such as support and resistance levels. **Risk-Reward Ratio** * **Definition:** The ratio of potential profit to potential loss. * **Optimal Ratios:** Many traders aim for a minimum risk-reward ratio of 1:2, meaning they risk $1 to potentially gain $2. * **Balancing Ratios:** Adjust your ratio based on the probability of trade success and market conditions. --- # Agent Instructions This documentation is published with GitBook. GitBook is the documentation platform designed so that both humans and AI agents can read, navigate, and reason over technical content effectively. Learn more at gitbook.com. ## Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. Perform an HTTP GET request on the current page URL with the `ask` query parameter, and the optional `goal` query parameter: ``` GET https://sigm-algo.gitbook.io/sigma-algo-docs/trading-101-fundamentals/risk-management.md?ask=&goal= ``` `ask` is the immediate question: it should be specific, self-contained, and written in natural language. `goal` is optional and describes the broader end goal you are ultimately trying to accomplish on behalf of the user. GitBook uses it to tailor the answer towards what is most useful for that goal. The response will contain a direct answer to the question and relevant excerpts and sources from the documentation. Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.