Risk Management: The Only Edge That Lasts
2026-02-12
The Uncomfortable Truth
Most traders spend 90% of their time on entries and 10% on risk management. It should be the opposite.
A mediocre strategy with great risk management will survive. A great strategy with poor risk management will blow up. It’s not a matter of if, but when.
The Math of Ruin
| Loss | Gain Needed to Recover |
|---|---|
| -10% | +11.1% |
| -25% | +33.3% |
| -50% | +100% |
| -75% | +300% |
| -90% | +900% |
A 50% drawdown requires a 100% gain just to break even. In crypto with 5x leverage, a 10% adverse move = 50% loss on your position. This is why most leveraged traders get wiped out.
PRUVIQ’s Risk Framework
1. Position Sizing
Account: $3,000
Position: $60 (2% of account)
Leverage: 5x
Exposure: $300 (10% of account)No single trade can ruin the account. Even 10 consecutive stop-losses only cost ~$60 (about 2% of the account, since each individual SL loss is capped).
2. Hard Stop-Loss on Every Trade
No exceptions. No “let it ride.” No moving the stop.
The stop-loss is set before entry and managed by the exchange, not by the bot. If the bot crashes, the stop-loss still triggers.
3. Daily Loss Limit
If the account loses 7% in a single day, all new entries are paused. This prevents spiral losses during extreme market events.
4. Maximum Drawdown
If the account drops 20% from peak, the system is halted for review. No automated recovery attempts. Manual review required.
The Kelly Criterion (Simplified)
How much of your account should you risk per trade?
Kelly % = (Win Rate × Avg Win) - (Loss Rate × Avg Loss)
÷ Avg Win
Example (with leverage):
Win Rate: 55%, Avg Win: 6%, Avg Loss: 10%
Kelly = (0.55 × 6) - (0.45 × 10) ÷ 6
Kelly ≈ -0.2% → negative!Wait — negative Kelly? That means with these raw numbers, the strategy shouldn’t be traded at all?
Not exactly. Kelly assumes infinite trades and perfect execution. In practice, strategies with near-zero or slightly negative Kelly can still be profitable with careful position sizing and trade filtering. But it’s a warning: the edge is thin.
This is why PRUVIQ uses small position sizes and extensive filtering. The strategy doesn’t have a massive edge — it has a consistent, small edge that compounds over many trades.
Common Mistakes
- Risking too much per trade — 10% per trade means 5 losses = 50% drawdown
- No stop-loss — “it’ll come back” is the most expensive sentence in trading
- Averaging down — adding to losers doubles your risk, not your edge
- Ignoring correlation — 100 SHORT positions in a bull run = 100x the same bet
- Leverage without limits — 20x feels great until a 5% move liquidates you
The Bottom Line
Risk management isn’t about avoiding losses. It’s about ensuring no single loss — or series of losses — can end your ability to trade.
The best traders aren’t the ones with the highest win rate. They’re the ones still trading after 5 years.
This is educational content. Not financial advice.