Technical analysis foundations · Lesson 3 of 3
Planning trade risk
Connect entry, stop, position size and risk/reward.
9 minute read
Define the risk first
Position sizing can begin with an account-risk budget and the distance between entry and the planned stop. The calculation is an estimate: fees, slippage, contract multipliers and execution gaps can change the actual outcome.
A risk/reward ratio compares planned loss with planned reward. It does not tell you how likely the target is to be reached. A complete plan considers invalidation, uncertainty and whether the setup fits the user's risk tolerance.
Key takeaway
Use these concepts to understand the market, not to assume a particular outcome. Always define uncertainty and risk before making a decision.