Building a Professional Risk Management Plan 🛡️

The Professional Mindset:

"My primary job is not to make money—it's to not lose money. Profits are a byproduct of survival and consistency."

Why This Matters:

Amateur Thinking:

• "I need to make 10% this month"
• "This setup looks amazing, I'll risk 5%"
• "I'm down, I need to make it back quickly"
• Result: Account blown in 3 months

Professional Thinking:

• "I need to survive this year first"
• "Every setup gets exactly 1% risk, no exceptions"
• "I'm down, time to reduce risk and diagnose issues"
• Result: Still trading in 5 years, compounding gains

The Math of Survival:

Formula: 0.99^70 ≈ 0.49 (need 70 consecutive 1% losses to halve account)

Key Insight: At 1% risk, even a disastrous losing streak is recoverable. At 5%+ risk, a normal variance streak is catastrophic.

The Problem:

Even elite strategies with 60-65% win rates experience regular losing streaks.

Probability of Consecutive Losses:

Strategy: 60% Win Rate

Critical Understanding:

If you take 500 trades per year:

• You WILL experience multiple 4-loss streaks
• You WILL probably experience a 5-loss streak
• You MIGHT experience a 6-loss streak

This is not strategy failure—this is statistical reality.

Impact of Risk Management:

Scenario A: 1% Risk Per Trade

• 5 consecutive losses = -5% account
• Psychological: Manageable, frustrating but not devastating
• Mathematical: Requires 5.26% gain to recover (easy)
• Discipline: Likely maintained, continue following plan

Scenario B: 5% Risk Per Trade

• 5 consecutive losses = -22.6% account
• Psychological: Panic, question everything, emotional breakdown
• Mathematical: Requires 29.2% gain to recover (very difficult)
• Discipline: Destroyed, start revenge trading

The Takeaway:

Your Risk Management Plan must assume you'll hit a 6-8 loss streak eventually. If that streak would:

• Wipe out more than 10% of your account → risk too high
• Destroy your psychology → risk too high
• Force you to stop trading → risk too high

The Rule:

"I will risk a fixed 1% of my current account equity on every single trade. This percentage does not change based on confidence, recent wins/losses, or setup 'quality'. It is absolute."

Why 1% (Not 2%, Not 3%, Not 5%):

Mathematical Protection:

• 70 consecutive losses to lose 50% of capital
• 139 consecutive losses to lose 75% of capital
• Effectively impossible to blow account with a valid strategy

Psychological Protection:

• Losing 3 trades in a row = -3% (annoying, not catastrophic)
• No emotional spiral after losses
• Discipline remains intact

Compounding Efficiency:

• Small wins compound quickly
• Large losses don't destroy progress
• Smooth equity curve growth

The Calculation Formula:

Lot Size = (Account Equity × Risk %) ÷ (Stop Loss in Pips × Pip Value per Lot)

Example Calculation:

Given:

• Account Equity: $10,000
• Risk Percentage: 1% = $100
• Stop Loss Distance: 25 pips
• Pair: EUR/USD
• Pip Value: $10 per pip (for 1 standard lot)

Calculation:

Lot Size = ($10,000 × 0.01) ÷ (25 pips × $10 per pip)
Lot Size = $100 ÷ $250
Lot Size = 0.40 standard lots

Verification:

• If SL hits: 25 pips × $10 per pip × 0.40 lots = $100 loss ✓
• This is exactly 1% of $10,000 account ✓

Quick Reference Table:

For $10,000 account (1% risk = $100):

Rule: Recalculate lot size for EVERY trade based on:

1. Current account equity (changes after each trade)
2. Exact SL distance for THIS setup (varies by structure)

The Problem with Arbitrary SLs:

❌ "I always use 20-pip stop loss"

• Sometimes 20 pips is beyond structure (wastes risk)
• Sometimes 20 pips is inside structure (gets stopped out unnecessarily)
• No logic, just random number

✅ "I place SL based on structural invalidation"

• SL represents point where trade idea is invalidated
• If price reaches SL, setup actually failed
• Logical, defensible, objective

Rule Option 1: SMC/Order Block Method

"My Stop Loss will be placed 5 pips beyond the extremity of the Order Block that defines my entry:

• For Buy setups: 5 pips below the low of the bullish Order Block
• For Sell setups: 5 pips above the high of the bearish Order Block
• Alternative: 5 pips beyond the 79% level of the Optimal Trade Entry (OTE) zone"

Why This Works:

• Order Block is institutional entry zone
• If price breaches OB completely, institutions likely aren't defending it
• Trade idea = invalidated
• SL placement is logical

Example:

• Bullish Order Block: low at 1.0840, high at 1.0850
• Your entry: 1.0850 (top of OB)
• Your SL: 1.0835 (5 pips below 1.0840 low)
• SL distance: 15 pips
• Lot size calculated for 15-pip SL

Rule Option 2: Classic Swing Method

"My Stop Loss will be placed 5-10 pips beyond the most recent swing high/low that defines the current market structure:

• For Buy setups: 5-10 pips below the swing low that created the higher low
• For Sell setups: 5-10 pips above the swing high that created the lower high"

Why This Works:

• Swing points define market structure
• If structure breaks, trend context changes
• Trade idea = invalidated
• SL placement is logical

Example:

• Bullish setup (Higher Lows structure)
• Most recent swing low: 1.0825
• Your entry on pullback: 1.0860
• Your SL: 1.0815 (10 pips below swing low)
• SL distance: 45 pips
• Lot size calculated for 45-pip SL

The Buffer Principle:

Always add 5-10 pip buffer beyond the exact structural level because:

• Spread exists (2-3 pips on majors)
• Wicks can spike slightly beyond structure
• Psychological stops cluster at round numbers
• Market makers hunt these clusters

Example:

• Order Block low: 1.0850
• Psychological level: 1.0850 (round number)
• Many traders' SL: 1.0849
• Your SL: 1.0845 (5-pip buffer, avoids the cluster)

What NOT to Do:

❌ "I use 30-pip SL because that's what my friend uses"
❌ "I set SL at the next support level 80 pips away" (too wide, wastes risk)
❌ "I use 5-pip SL because I want to risk less" (too tight, random stops)
❌ "I don't use SL, I'll close manually" (guaranteed disaster)

The Concept:

Amateur Thinking:

• "I'm risking 1% per trade, so I can take 10 trades and risk 10%"
• Problem: Ignores correlation risk

Professional Thinking:

• "I'm risking 1% per trade, but correlated trades count as ONE risk unit"
• Solution: Total open risk cap with correlation adjustment

Rule Statement:

"My Total Open Risk across all active trades will never exceed 4-5% of my account equity. Highly correlated positions (correlation > 0.7) will be counted as a single 1% risk unit toward this limit."

Understanding Correlation:

High Correlation Pairs (> 0.7 correlation):

• EUR/USD + GBP/USD (both long or both short)
• AUD/USD + NZD/USD (commodity currency pair)
• EUR/USD + USD/CHF (inverse correlation, same directional risk)

If you're long EUR/USD and long GBP/USD:

• You think: "I have 2 independent trades, 1% risk each = 2% total"
• Reality: "I have 2 correlated bets on USD weakness = ~1.8% effective risk"
• They will often win/lose together

Proper Position Management:

Scenario A: Uncorrelated Positions (✅ OK)

• Long EUR/USD (risk 1%)
• Long GBP/JPY (risk 1%)
• Short AUD/CHF (risk 1%)
• Long Gold/XAU (risk 1%)
• Total Open Risk: 4% (all relatively uncorrelated)
• ✅ Allowed under 5% cap

Scenario B: Correlated Positions (⚠️ Watch Out)

• Long EUR/USD (risk 1%)
• Long GBP/USD (risk 1%)
• Long AUD/USD (risk 1%)
• All betting on USD weakness
• Effective risk: ~2.5-2.8% (not 3%)
• ⚠️ Treat as 2-3 position equivalents

Scenario C: Over-Leveraged (❌ Violation)

• Long EUR/USD (risk 1%)
• Long GBP/USD (risk 1%)
• Long EUR/GBP (risk 1%)
• Long GBP/JPY (risk 1%)
• Long EUR/JPY (risk 1%)
• All correlated through GBP/EUR exposure
• Effective risk: 4-5% on essentially same directional bet
• ❌ Violates plan, reduce positions

Risk Dashboard:

Keep a visual tracker:

Current Open Positions:
1. EUR/USD Long (1%) - Correlation Group: USD
2. GBP/USD Long (1%) - Correlation Group: USD
3. USD/JPY Short (1%) - Correlation Group: USD
4. Gold/XAU Long (1%) - Correlation Group: Uncorrelated

Total Positions: 4
Correlated Units: 2.5 (3 USD positions count as ~2 units)
Effective Total Risk: ~3.5-4%
Status: ✅ Within 5% limit

What is Drawdown:

Drawdown = The percentage decline from your peak account equity.

Example:

• Account reaches $12,000 (peak)
• After losses, account is at $10,800
• Drawdown: ($12,000 - $10,800) ÷ $12,000 = 10%

Three-Tier Drawdown System:

Tier 1: Daily Loss Limit (Circuit Breaker)

Rule:

"If I incur a total daily loss exceeding 3% of my starting-day capital, I must immediately stop trading for the remainder of the day. I may not open new positions or modify existing positions except to close them."

Why 3%:

• Represents 3 consecutive 1% losses
• Statistically rare but possible
• Emotional tipping point — after 3 losses, revenge trading risk spikes

Action Steps:

1. Close trading platform
2. Do NOT watch charts (removes temptation)
3. Journal all 3 losses with detailed analysis
4. Review: Did I follow all rules?
5. If rules followed → Normal variance, resume tomorrow
6. If rules broken → Identify violation, create corrective action

Tier 2: Weekly Loss Limit

Rule:

"If I incur a total weekly loss exceeding 5% of my capital, I must stop trading for 3 days and conduct a full strategy audit."

Why 5%:

• Represents 5+ losses in a week
• Suggests either bad luck OR strategy/execution issue
• Cooling-off period needed

Action Steps:

1. Stop all trading
2. Full journal review (every trade)
3. Calculate actual vs. expected metrics
4. Identify: Strategy failure, execution failure, or bad variance?
5. If strategy/execution issue → Make specific fix
6. If bad variance → Resume with confidence
7. May resume at reduced risk (0.75%) for next 20 trades

Tier 3: Total Equity Drawdown

Rule:

"If my total account equity suffers a 10% drawdown from peak balance, I will:

1. Immediately reduce my risk per trade to 0.5% (half normal)
2. Reduce maximum concurrent positions from 4 to 2
3. Continue at reduced risk until account recovers to within 5% of peak
4. Only then return to full 1% risk"

Why 10%:

• Significant but survivable drawdown
• Requires 11.1% gain to recover
• Defensive posture protects remaining capital

Mathematical Impact:

Normal Risk (1%):

• 10 trades × 1% loss each = -10% drawdown
• Now at 90% of starting capital
• Need 11.1% gain to break even

Reduced Risk (0.5%):

• Each trade risks only 0.5% of remaining capital
• Slower to drawdown further
• Psychological pressure reduced
• Allows strategy to "breathe" and recover

Maximum Drawdown Threshold (Kill Switch):

Rule:

"If my account drawdown reaches 15% from peak equity:

1. STOP ALL TRADING immediately
2. Strategy is invalidated or I'm executing poorly
3. Must re-validate strategy through full backtest and forward test
4. Do NOT resume live trading until new validation complete
5. Alternatively: Conclude trading is not for me, preserve remaining capital"

Why 15%:

• This is beyond normal variance for a good strategy
• Either strategy broken OR discipline destroyed
• Must diagnose and fix before continuing

The Difficult Truth:

• Hitting 15% DD means something is seriously wrong
• Continuing to trade while wrong = account destruction
• Stopping and investigating is not failure—it's professionalism

The Problem:

Without rules, trade management becomes emotional:

• "Should I take profit now or let it run?"
• "Should I move my SL or leave it?"
• "Should I close everything or partial?"
• Emotion-driven decisions = inconsistent results

The Solution:

Pre-defined, mechanical rules that execute automatically based on price action.

Rule 1: Break-Even Protocol

Statement:

"I will move my Stop Loss to break-even (entry price) immediately after price reaches 1:1 Risk-Reward ratio AND I have closed my first partial profit (50% of position)."

Example:

• Entry: 1.0850 (Buy)
• SL: 1.0830 (20 pips)
• Initial TP: 1.0890 (40 pips, 1:2 R:R)
• When price reaches 1.0870 (1:1 R:R, +20 pips):
  1. Close 50% of position (secure 1R profit)
  2. Move SL on remaining 50% to 1.0850 (break-even)
  3. Result: Risk-free position, secured minimum 0.5R profit

Why This Works:

• Eliminates risk of profitable trade turning into loss
• Psychological relief (can't lose anymore)
• Allows remaining position to run risk-free
• Locks in minimum win

Common Mistake:

• Moving SL to break-even TOO EARLY (before 1:1)
• Price retraces normally, hits BE stop
• Would have hit original SL later
• Premature BE = reduced win rate

Rule 2: Partial Profit Taking (Scaling Out)

Statement:

"I will close 50% of my position at Target 1 (T1), which is defined as:

• Primary: 1:1 Risk-Reward ratio, OR
• Alternative: Nearest opposing Fair Value Gap or liquidity pool
• Whichever comes first"

Example 1: Simple R:R

• Entry: 1.0850, SL: 1.0830 (20 pips)
• T1: 1.0870 (1:1 R:R)
• T2: 1.0890 (1:2 R:R)
• At 1.0870: Close 50%, move remaining SL to BE
• Let remaining 50% run to T2 or trailing stop

Example 2: Structure-Based

• Entry: 1.0850, SL: 1.0830
• Next opposing FVG: 1.0865 (15 pips away)
• At 1.0865: Close 50% (FVG acts as resistance)
• Move SL to BE
• T2 target remains 1.0890

Why Scaling Works:

• Balances two goals:
  1. Securing profit (risk-averse)
  2. Letting winners run (maximizing R:R)
• Reduces psychological pressure
• Improves consistency
• Statistically proven to improve Sharpe ratio

Rule 3: Remaining Position Management

Statement:

"For the remaining 50% of my position after T1:

• Option A: Place T2 at 1:2 or 1:3 R:R
• Option B: Use trailing stop (20-pip trail after 1.5:1 R:R)
• Option C: Target next major liquidity pool/structure
• Must be defined in advance, not decided mid-trade"

Example Outcome Scenarios:

Scenario A: Both Targets Hit (Ideal)

• T1: +1R on 50% = +0.5R
• T2: +2R on 50% = +1.0R
• Total: +1.5R

Scenario B: Only T1 Hit, T2 Stopped at BE

• T1: +1R on 50% = +0.5R
• T2: Stopped at break-even = 0R
• Total: +0.5R (still a win!)

Scenario C: Original SL Hit (Loss)

• Neither T1 nor T2 reached
• Full position stopped out
• Total: -1R

The Beauty:

• Scenario B happens frequently (50% win rate on reaching T1)
• Even when T2 doesn't hit, you still profit
• Reduces maximum loss, increases win rate

The Problem:

High-impact news events (NFP, Rate Decisions, CPI) create:

• Extreme volatility (100+ pip moves in seconds)
• Spread widening (1-pip spread becomes 10 pips)
• Slippage (orders filled 5-10 pips worse)
• Whipsaws (rapid reversals)
• Normal trading rules break down

Rule 1: No New Entries

Statement:

"I will NOT open any new positions within 15 minutes before or after any scheduled high-impact economic calendar release (marked as 'Red Folder' or 'High Impact')."

Why:

• Direction is random (50/50 guess)
• Execution quality is terrible (slippage)
• Risk-reward is undefined (unpredictable moves)
• Not trading is a trade (preserving capital)

High-Impact Events:

• Non-Farm Payrolls (NFP)
• CPI (Inflation data)
• Interest Rate Decisions
• FOMC Statements
• Central Bank Press Conferences
• GDP Releases

Rule 2: Protect Existing Positions

Statement:

"For any open trade with a Stop Loss less than 30 pips from current price going into a high-impact event, I must either:

1. Close the position entirely (preserve capital), OR
2. Widen the SL to 30+ pips (reduce slippage risk), OR
3. Hedge the position temporarily (advanced)"

Why:

• Tight SLs get hit by random whipsaws during news
• Slippage on 15-pip SL can be 5-10 pips (33-66% of SL size)
• Better to exit and re-enter than suffer bad execution

Example:

• Position: Long EUR/USD at 1.0850, SL at 1.0830 (20 pips)
• Current price: 1.0870 (already +20 pips profit, at 1:1 R:R)
• NFP in 10 minutes
• Action: Close 100% of position, secure +1R profit, avoid news risk

Alternative (If losing position):

• Position: Long EUR/USD at 1.0850, SL at 1.0830 (20 pips)
• Current price: 1.0840 (-10 pips unrealized loss)
• NFP in 10 minutes
• Action: Close position, accept -0.5R loss, avoid larger news slippage loss

The Reality:

Most trading failures are not strategy failures—they're discipline failures:

• Revenge trading after losses
• FOMO (fear of missing out) entries
• Overleveraging on "sure things"
• Violating SL rules
• Emotion overriding logic

Your plan must include explicit rules to prevent psychological collapse.

Rule 1: Maximum Trades Per Day

Statement:

"I will open a maximum of 3 trades per day, regardless of how many valid setups appear."

Why:

• Prevents overtrading (most common amateur mistake)
• Forces trade quality over quantity
• Reduces decision fatigue
• Protects against emotional spiral

Example:

• 9 AM: Take Trade 1 (valid setup)
• 11 AM: Take Trade 2 (valid setup)
• 1 PM: Take Trade 3 (valid setup)
• 3 PM: See another perfect setup
• Action: DO NOT TAKE IT (reached daily limit)
• If all 3 earlier trades lost, this prevents #4 from being revenge trade

Rule 2: No Revenge Trading

Statement:

"I will NOT open a new trade within 30 minutes of closing a losing trade. I must use this mandatory cooling-off period to journal the loss and verify my next trade follows my complete checklist."

Why:

• Revenge trading = trying to "get back" lost money immediately
• Emotion is highest right after loss
• Usually leads to violating rules (bigger risk, lower quality setup)
• Most common cause of blown accounts

The Cycle:

1. Lose Trade 1 (-1%)
2. Immediately take Trade 2 to recover (violates wait period)
3. Trade 2 didn't meet all criteria (rushed, emotional)
4. Lose Trade 2 (-1%)
5. Now down -2%, MORE emotional
6. Take Trade 3 with 3% risk (violates risk rule)
7. Account destruction begins

Break the Cycle:

• Mandatory 30-min wait
• Journal the loss
• Review next setup against full checklist
• Only proceed if 100% criteria met

Rule 3: Pre-Session Checklist

Statement:

"Before opening my trading platform each day, I must complete this checklist:

• Read my complete Risk Management Plan
• Review economic calendar for today's high-impact events
• Check current open positions and total open risk
• Confirm: Am I mentally ready to trade? (well-rested, focused, not emotional)
• If ANY box unchecked → DO NOT TRADE"

Why:

• Creates ritual and discipline
• Catches emotional/physical issues before they affect trading
• Accountability gate

Rule 4: Mandatory Journaling

Statement:

"I will log every trade in my trading journal immediately after closing, including:

• Entry/exit data (objective)
• Setup type and rules met (objective)
• Emotional state at entry and exit (subjective)
• Rule compliance: YES or NO (did I follow plan 100%?)
• If NO → What rule was violated and why?"

Why:

• Creates accountability
• Reveals patterns (emotional triggers)
• Only way to identify and fix discipline issues

Example Journal Entry:

Trade #47: EUR/USD Long
Date: May 15, 2024
Entry: 1.0850 | SL: 1.0830 | TP: 1.0890
Outcome: +40 pips (+2R)

Setup: Bullish OB in OTE after MSS and liquidity sweep
Rules Met: ✓ All criteria met

Emotional State:
- Pre-entry: 7/10 confidence (clear setup)
- During: Calm (moved SL to BE at 1:1)
- Post-exit: Satisfied (followed plan perfectly)

Rule Compliance: YES (100%)
Notes: Perfect execution, no changes needed

The Problem:

Even with perfect strategy and discipline, poor execution can destroy your edge:

• Wide spreads eat your profits
• Slippage on entries/exits reduces R:R
• Requotes prevent fills
• Platform freezes during volatility
• Your broker can be your biggest risk

Rule 1: Broker Selection and Monitoring

Statement:

"I will only trade with a regulated ECN/STP broker that meets these criteria:

• ✅ Regulated by tier-1 authority (FCA, ASIC, CySEC, NFA)
• ✅ True ECN or STP execution (no dealing desk)
• ✅ Average spread on majors: < 1.5 pips
• ✅ Verified execution speed: < 50ms average
• ✅ No consistent slippage or requote complaints
• ✅ Segregated client funds
• ✅ Supports MT4/MT5 or professional platform"

Why Each Criteria:

Regulation:

• Protects your capital
• Legal recourse if issues
• Prevents scam brokers

ECN/STP:

• Orders routed to liquidity providers
• No conflict of interest (broker doesn't trade against you)
• Better fills

Tight Spreads:

• Lower cost per trade
• Scalping strategies viable
• Improves expectancy

Fast Execution:

• Reduced slippage
• Critical during volatility
• Preserves R:R

Rule 2: Execution Quality Monitoring

Statement:

"I will track execution quality for my first 20 trades and every month thereafter:

• Record requested price vs. filled price (every entry/SL/TP)
• Calculate average slippage in pips
• If average slippage > 1 pip on majors → Change brokers"

How to Track:

Average: Sum slippage ÷ number of executions

Acceptable: 0-0.5 pips average on majors
Warning: 0.5-1.0 pips (monitor closely)
Unacceptable: > 1.0 pips (change brokers)

Rule 3: VPS Usage (Advanced)

Statement:

"If I am day trading or using automated strategies, I will run my trading platform on a VPS (Virtual Private Server) located near my broker's servers."

Why:

• Reduces latency from 100-200ms to 1-10ms
• Prevents internet/power disruptions
• 24/7 uptime for EAs

When Needed:

• ✅ Day trading / scalping (tight SLs)
• ✅ Running EAs (automated strategies)
• ✅ Poor home internet connection

When Optional:

• Swing trading (wider SLs, less sensitive to 100ms delay)
• Manual trading only (no EA)
• Excellent home internet

Cost: $10-30/month (worth it for serious traders)

The Temptation:

• Saw perfect OB setup, missed it
• It goes on to make 100 pips
• Feel frustrated, want to "catch up"
• Next setup appears
• "I'll risk 2% on this one to make up for missing that one"

Why This is Catastrophic:

Mathematical Reason:

• Your entire risk management is based on fixed 1%
• One 2% loss = two 1% losses
• Breaks the statistical buffer (now need only 35 losses to halve account, not 70)

Psychological Reason:

• Once you break the rule once, easier to break again
• "I'll risk 3% on this one, it's really good"
• Slippery slope to account destruction
• Discipline is binary: either you have it or you don't

Strategic Reason:

• Missed trades are NORMAL (can't take every setup)
• No setup is "so good" it justifies breaking rules
• The next trade is independent of the last missed one

The Correct Response:

• Accept you missed the trade (happens to everyone)
• Wait for the NEXT valid setup
• Risk exactly 1% on it
• Follow the plan, always

Remember: Missing one great trade but following your plan >> taking one "great" trade and breaking your plan. The plan is more valuable than any single trade.

Step 1: Immediate Actions (Day 1)

• Reduce risk per trade from 1% to 0.5%
• Reduce maximum concurrent positions from 4 to 2
• Close any open positions that are in loss (cut exposure)
• Stop aggressive trading, enter defensive mode

Step 2: Analysis (Days 1-3)

Review your trading journal:

• How many trades led to this drawdown?
• What was your rule compliance rate?
• Calculate: Expected vs. actual win rate
• Calculate: Expected vs. actual R:R achieved

Categorize the Problem:

Category A: Normal Variance

• Followed rules 95%+ of the time
• Hit a statistical losing streak (8-10 losses)
• Win rate and R:R close to expectations
• Diagnosis: Bad luck, strategy is fine

Category B: Execution Failure

• Broke rules on several trades
• Took trades that didn't meet all criteria
• Moved SLs or took profits prematurely
• Diagnosis: Discipline problem, not strategy problem

Category C: Strategy Failure

• Followed rules perfectly
• Win rate or R:R significantly worse than expected
• Market regime changed (trending → ranging)
• Diagnosis: Strategy needs adjustment or market unsuitable

Step 3: Action Based on Category

If Category A (Normal Variance):

• ✅ Continue trading at reduced 0.5% risk
• ✅ Follow plan exactly (it's working, just variance)
• ✅ Once recover to -5% DD, return to 1% risk
• ✅ Be patient, trust the math

If Category B (Execution Failure):

• ⚠️ Identify specific rule violations
• ⚠️ Create corrective actions for each
• ⚠️ Practice on demo for 20 trades (rebuild discipline)
• ⚠️ Only return to live when rule compliance > 95% on demo

If Category C (Strategy Failure):

• ❌ Stop trading this strategy immediately
• ❌ Strategy must be re-validated (new backtest + forward test)
• ❌ Do NOT resume live trading until re-validated
• ❌ Consider: Is this strategy suitable for current market regime?

Step 4: Recovery

• Continue at 0.5% risk until account recovers to -5% DD
• Then return to 1% risk
• DO NOT try to "make it back quickly" with higher risk

The Mindset:

• 10% DD is NOT catastrophic (requires only 11.1% gain to recover)
• Following the protocol shows discipline
• Stopping and analyzing is strength, not weakness

Why This Matters:

Not all pairs are created equal:

• Majors: Tight spreads (0.5-2 pips), high liquidity
• Minors: Moderate spreads (2-5 pips), good liquidity
• Exotics: Wide spreads (5-20+ pips), low liquidity

Spread Impact on Strategy:

Example: EUR/USD (1-pip spread) vs. USD/TRY (10-pip spread)

Same strategy, same 30-pip SL, same 60-pip TP (1:2 R:R):

EUR/USD:

• Entry: Pay 1-pip spread
• Effective R:R: 1:1.97 (barely affected)
• Expectancy: +0.42R

USD/TRY:

• Entry: Pay 10-pip spread
• Effective R:R: 1:1.67 (significantly worse)
• Expectancy: +0.15R (67% reduction!)

Same strategy, but the wide spread on exotic pair DESTROYS the edge.

Recommended Rule:

"I will only trade the following pre-approved currency pairs:

• Primary: EUR/USD, GBP/USD, USD/JPY (tightest spreads, highest liquidity)
• Secondary: AUD/USD, NZD/USD, USD/CAD (good spreads, good liquidity)
• Prohibited: All exotic pairs (Turkish Lira, South African Rand, etc.)

I will NOT impulsively trade pairs outside this list based on 'good setups'—if a setup appears on a non-approved pair, I will skip it."

Why This Works:

• Forces focus on liquid, low-cost pairs
• Prevents impulsive trading of unfamiliar pairs
• Consistent execution costs
• Easy to backtest (same pairs always)

Additional Considerations:

Session Rules:

"I will primarily trade pairs during their most liquid sessions:

• EUR pairs: London session (08:00-16:00 GMT)
• USD pairs: NY session (13:00-21:00 GMT)
• JPY pairs: Asian session (23:00-08:00 GMT)"

Why: Liquidity = tighter spreads, less slippage, clearer moves

The Psychological Reality:

Unwritten "Plan" (Mental Rules):

• Flexible (you change them to fit what you want to do)
• Forgettable (you forget rules when emotional)
• Deniable (no accountability)
• Result: No plan at all

Written Plan:

• Fixed (you confront yourself when you want to break rules)
• Reference (you review it daily)
• Accountable (clear violations are visible)
• Result: Actual discipline

How to Create Your Written Plan:

Step 1: Physical Document

• Open Word/Google Docs
• Title: "My Risk Management Plan - [Your Name]"
• Date it

Step 2: Structure (Use This Lesson's Framework)

• Philosophy: Capital preservation first
• Pillar 1: Position sizing (1% rule, SL placement)
• Pillar 2: Exposure caps, drawdown policy
• Pillar 3: Trade management, news protocol
• Pillar 4: Psychology rules, broker requirements

Step 3: Be Specific

• Don't write: "I'll use small risk"
• Write: "I will risk exactly 1% of current equity per trade"
• Specificity = Enforceability

Step 4: Sign It

• Literally sign and date the document
• Psychological commitment
• Makes it official

Step 5: Print and Place

• Print the document
• Place it next to your trading desk
• Review it EVERY SINGLE DAY before opening your platform

Step 6: Version Control

• When you update the plan (after 100 trades, major change)
• Create new version
• Date it
• Keep old versions for reference
• Track your evolution

Example Template:

MY RISK MANAGEMENT PLAN
Trader: [Your Name]
Date: [Today's Date]
Version: 1.0

═══════════════════════════════════════

POSITION SIZING
- Fixed risk: 1.0% per trade
- Maximum risk: 1.5% (only with triple confluence)
- SL placement: 5 pips beyond Order Block extremity
- Lot size formula: [Your specific calculation]

EXPOSURE & DRAWDOWN
- Total open risk cap: 4%
- Daily loss limit: 3% → Stop trading
- Total drawdown 10% → Reduce to 0.5% risk
- Total drawdown 15% → Stop trading, re-validate

TRADE MANAGEMENT
- T1: 50% off at 1:1 R:R
- Move SL to BE after T1
- T2: 1:2-1:3 R:R or structure
- News: No entries ±15 min of high-impact

PSYCHOLOGY & DISCIPLINE
- Maximum 3 trades per day
- 30-min cooling after losses
- Mandatory journaling every trade
- Pre-session checklist required

APPROVED PAIRS
- EUR/USD, GBP/USD, USD/JPY only

BROKER REQUIREMENTS
- Regulated ECN/STP
- < 1.5 pip average spread on majors
- Monitor execution quality monthly

═══════════════════════════════════════

I commit to following this plan without exception.

Signed: _______________    Date: ___________