1. Why Risk Management is the Key to Long-Term Trading Success
No matter how good your trade entries are, without proper risk management, you won’t survive in trading. The ICT methodology, as taught by Michael Huddleston, is not just about identifying high-probability trades—it’s also about managing risk like institutions do.
📌 The goal of risk management is not just to win trades, but to survive long enough to let your edge play out over time.
Many traders focus only on finding the perfect setup, but the truth is:
✔️ Even the best traders lose trades – Risk management ensures losses are controlled.
✔️ Smart money doesn’t gamble – Institutions manage risk with precision.
✔️ Your trading plan must account for losses – Because they are inevitable.
As Dave – No Nonsense Trader, I know that consistent risk management separates successful traders from those who blow accounts. In this chapter, we’ll focus on protecting capital, managing losses, and maintaining profitability over time.
📌 Image Guide:
2. The 1-2% Rule: Never Risk Too Much Per Trade
📌 The golden rule of risk management: Never risk more than 1-2% of your total trading capital per trade.
Why?
✔️ If you risk 10% per trade, just 5 losses in a row wipes out 50% of your account.
✔️ If you risk 1-2% per trade, even a losing streak doesn’t destroy your capital.
🔍 Example:
If you have a $10,000 account, risking 1% per trade means you only risk $100 per trade. Even if you lose 10 trades in a row, you still have 90% of your account intact to recover.
📌 Image Guide:
3. Stop-Loss Placement: How to Protect Your Trades
📌 A stop-loss (SL) is an automatic order that exits your trade at a predefined loss level.
How to Set a Proper Stop-Loss in ICT Trading:
✔️ Place stops beyond liquidity zones – Avoid being stopped out before the real move.
✔️ Use market structure – Stops should be placed past the previous swing high/low.
✔️ Avoid placing stops in obvious retail areas – Institutions hunt stops in predictable zones.
🔍 Example:
- If you go long, place your stop below sell-side liquidity (SSL) to avoid being taken out before the move up.
- If you go short, place your stop above buy-side liquidity (BSL).
📌 Image Guide:
4. Risk-to-Reward Ratios (RRR): How to Maximize Profits
📌 Your risk-to-reward ratio (RRR) determines whether your strategy is profitable in the long run.
📌 ICT traders aim for a minimum of 1:2 or 1:3 RRR, meaning they risk $1 to make $2 or $3.
🔍 Example:
- 1:1 RRR → Break-even over time (not recommended).
- 1:2 RRR → You only need to win 40% of trades to be profitable.
- 1:3 RRR → Even a 33% win rate keeps you profitable.
How to Apply RRR in ICT Trading:
✔️ Find a liquidity pool as a profit target → Always aim for high-probability exit zones.
✔️ Match stop-loss with market structure → Stops should not be too tight or too wide.
✔️ Let trades run to full potential → Don’t take profits too early.
📌 Image Guide:
5. Trade Journaling: Tracking Risk & Performance
📌 Professional traders track every trade to analyze mistakes and improve their strategies.
What to Track in a Trading Journal:
✔️ Entry & Exit Points – Did you follow ICT concepts?
✔️ Risk Per Trade – Did you stay within the 1-2% rule?
✔️ Mistakes & Emotional Reactions – Did you close early or revenge trade?
✔️ Market Conditions – Was it a high-liquidity session?
🔍 Example:
If you notice that you keep getting stopped out too early, reviewing your journal might reveal that you’re placing stops in obvious retail zones rather than past liquidity pools.
📌 Image Guide:
6. The Psychological Side of Risk Management
📌 Emotional discipline is a key part of risk management.
✔️ Avoid revenge trading – Accept losses and move on.
✔️ Don’t widen stop-losses – Stick to pre-planned risk levels.
✔️ Detach from trade outcomes – Focus on execution, not emotions.
🔍 Example:
If you lose three trades in a row, don’t double down on the next trade to recover losses. Stick to your plan, because the next winning trade could be right around the corner.
📌 Image Guide:
7. Conclusion & What’s Next
📌 Key Takeaways from This Chapter:
✅ Risk 1-2% per trade – Protect capital from large drawdowns.
✅ Use liquidity & market structure for stop-loss placement – Avoid stop hunts.
✅ Aim for a minimum of 1:2 or 1:3 RRR – Ensure long-term profitability.
✅ Keep a trading journal – Learn from mistakes and refine your strategy.
✅ Stay emotionally disciplined – Trading is a marathon, not a sprint.
📌 Next Up: Chapter Six – Trading Psychology & Discipline 🚀