Straight, sourced answers to the 36 questions traders actually ask.
Risk about 1 percent of your account on any one trade, and no more than 2 percent.
Risk here means the loss if your stop is hit, not the position's full value. At 1 percent, even ten losses in a row cost only about 10 percent of the account, which is recoverable.
Read next: Course 1 Module 2 (Position Sizing); glossary: The 1% ruleDivide the dollars you will risk by the distance from your entry to your stop, per unit.
This makes the loss on the trade a fixed amount regardless of the instrument. A wider stop gives a smaller position and a tighter stop a larger one, for the same dollar risk.
Read next: Course 1 Module 2; glossary: Position size formulaBecause the amount you can lose, not the position's face value, is what actually threatens your account.
A $10,000 position with a stop 5 percent away only risks $500. Sizing on risk keeps leverage from tricking you into an oversized loss.
Read next: Course 1 Module 2; glossary: Notional versus riskYes, if you risk too much per trade, because even a good edge hits normal losing streaks.
This is called risk of ruin: a run of losses can deplete the account before the edge plays out. Small, consistent risk per trade is what keeps a profitable strategy alive.
Read next: Course 1 Module 1 (Why Risk Management Comes First); glossary: Risk of ruinPlace it where your trade idea is proven wrong, then size the position to that distance.
A stop belongs beyond a support or resistance level or outside a volatility band, not at an arbitrary dollar amount. If the logical stop is too far for your risk budget, trade smaller rather than using a tighter, illogical stop.
Read next: Course 1 Module 3 (Stop-Losses and Drawdown); glossary: Stop-lossNo. Widening a live stop converts a planned small loss into an open-ended one.
A stop should only ever move in your favor, as a trailing stop. Moving it away is how a 1 percent risk silently becomes a 10 percent loss.
Read next: Course 1 Module 3; glossary: Trailing stopYou need a 100 percent gain, not 50 percent, because you are now growing from a smaller base.
Recovery is asymmetric: a 10 percent loss needs about 11.1 percent, a 25 percent loss needs 33.3 percent, and a 75 percent loss needs 300 percent. This is why keeping losses small matters so much.
Read next: Course 1 Module 1 and 3; glossary: Drawdown recoveryA drawdown is the drop in your account from a peak to a later low, and it measures how painful and survivable a strategy is.
The maximum drawdown is the worst such drop over a period. Because deep drawdowns need disproportionately large gains to recover, containing them is central to staying solvent.
Read next: Course 1 Module 3; glossary: Drawdown, Maximum drawdownNo. A stop guarantees an exit, not a price, and in fast or gapping markets your fill can be worse.
That gap between expected and actual price is slippage. Size with a little room for it so a planned loss does not silently grow.
Read next: Course 1 Module 3; glossary: SlippageVolatility is how much a price swings over time, and it sets how far a trade can move against you before your idea is even wrong.
It says nothing about direction, only the size of the swings. Bigger swings should mean a wider stop and therefore a smaller position for the same dollar risk.
Read next: Course 1 Module 4 (Volatility); glossary: VolatilityNo. Volatility measures the size of price moves, not their direction.
A highly volatile instrument can move sharply either way. Indicators like standard deviation and ATR are directionless by design.
Read next: Course 1 Module 4; glossary: Average True Range (ATR)Set the stop a multiple of Average True Range away, such as 1.5 or 2 times ATR, then size to it.
ATR is quoted in the instrument's price units, so it plugs straight into the sizing formula. When volatility rises, the stop widens and your position automatically shrinks.
Read next: Course 1 Module 4; glossary: Average True Range (ATR), True rangeBecause volatility scales with the square root of time, not time itself, since variances add across independent periods.
To annualize a daily standard deviation you multiply by the square root of 252 trading days. The rule assumes independent returns and can understate risk during a crisis when moves cluster.
Read next: Course 1 Module 4; glossary: Annualized volatility, VarianceNo. A system can win most of its trades and still lose money if its losses are large relative to its wins.
For example, a 70 percent win rate that risks 3 to make 1 has an expectancy of (0.7 x 1) minus (0.3 x 3), which is -0.2R per trade, a losing system. Win rate only matters alongside the size of wins versus losses.
Read next: Course 1 Module 5 (Risk/Reward and Expectancy); glossary: Win rate, ExpectancyPositive expectancy, meaning the average result per trade is a gain once you weight wins and losses by how often each happens.
Expectancy combines win rate and reward-to-risk into one number. A 40 percent win rate at 3:1 gives (0.4 x 3) minus (0.6 x 1), or +0.6R per trade, a profitable system despite losing most trades.
Read next: Course 1 Module 5; glossary: Expectancy, Expected valueThere is no single good number; the right ratio depends on your win rate, and only expectancy tells you if the combination is profitable.
Widening your target raises the reward-to-risk but lowers the win rate, and tightening it does the reverse. Aim for positive expectancy rather than a specific ratio.
Read next: Course 1 Module 5; glossary: Risk/reward ratio, R-multipleFar less than the full Kelly amount; most traders use a fraction of it, which is why the 1 percent rule is common.
The Kelly Criterion gives the growth-optimal stake, but full Kelly is very aggressive and edges are estimated with error, so half or quarter Kelly is used in practice. The 1 percent rule sits well below full Kelly on purpose.
Read next: Course 1 Module 5; glossary: Kelly Criterion, Fractional KellyBecause that is a martingale, and it maximizes your exposure exactly when you are most wrong, risking an unrecoverable loss.
One extended losing run bankrupts the account. Adding to losers to average down is the same mistake in another form.
Read next: Course 1 Module 7 (How Accounts Blow Up); glossary: Martingale, Averaging downLeverage lets you control a position larger than your cash, and it multiplies both gains and losses relative to your capital.
It does not change the asset's own move, only its size relative to your money: at 10x, a 5 percent move becomes 50 percent of your equity. It is a risk amplifier, not a strategy.
Read next: Course 1 Module 6 and Course 2 Module 4; glossary: LeverageMargin is the deposit you post to open a leveraged position; initial margin opens it and maintenance margin is the minimum you must keep to hold it.
Fall below the maintenance level and you face a margin call or liquidation. The gap between the two is a cushion that lets price move before the venue acts.
Read next: Course 2 Module 4 (Leverage and Margin); glossary: Margin, Initial margin, Maintenance marginNo. Higher leverage does not improve your odds; it only reduces how much room the trade has before liquidation.
The asset moves the same percentage either way. More leverage simply means a smaller adverse move wipes your margin.
Read next: Course 1 Module 6; glossary: Leverage, Liquidation priceAs little as needed, chosen from your risk-per-trade budget rather than the maximum a venue offers.
Low leverage keeps your liquidation price far from entry and lets your stop, not the exchange, end the trade. Most blown accounts were not wrong about direction; they were liquidated by a normal move.
Read next: Course 1 Module 6 and 7; glossary: Leverage, LiquidationBecause liquidation happens when losses draw your margin down to the maintenance level, which is reached long before the price hits zero.
At 10x leverage your whole margin is roughly gone after only about a 10 percent adverse move, and liquidation triggers slightly before that because of the maintenance buffer. The higher the leverage, the smaller the move needed.
Read next: Course 2 Module 6 (Liquidation Mechanics); glossary: Liquidation, Maintenance marginFor an isolated long, a widely used estimate is entry times (1 minus 1 over leverage plus the maintenance margin rate); for a short the signs flip.
For example, a long at $60,000 with 10x leverage and a 0.5 percent maintenance margin rate liquidates near $54,300, a 9.5 percent move away. The exact figure varies by venue and by isolated versus cross margin.
Read next: Course 2 Module 6; glossary: Liquidation price, Maintenance margin rate (MMR)Use low leverage and keep a stop-loss well inside your liquidation price so you exit first.
Also keep spare margin rather than posting the bare minimum, and remember that funding and fees erode margin too. Liquidation is a leverage problem, and less leverage is the cure.
Read next: Course 2 Module 6; glossary: Liquidation, Stop-lossA margin call is a demand to add funds when equity falls below maintenance margin; liquidation is the forced closure of the position if that is not met.
On many crypto venues there is no time to answer a call and the position is simply liquidated. Both are triggered by equity reaching the maintenance level.
Read next: Course 2 Module 4 and 6; glossary: Margin call, LiquidationOn spot you buy and own the actual asset now; a derivative is a contract whose value derives from that asset, which you hold instead of the asset.
Spot is direct ownership with loss capped at what you paid. A derivative lets you use leverage, hedge, or go short, but adds risks like liquidation and, for perpetuals, funding.
Read next: Course 2 Module 1 (Spot vs Derivatives); glossary: Spot market, DerivativeA dated future has an expiry date and settles then; a perpetual has no expiry and can be held indefinitely.
With no expiry to pull it toward spot, a perpetual uses a funding rate and mark price to stay anchored. Perpetuals are the dominant crypto derivative.
Read next: Course 2 Module 2 and 3; glossary: Futures contract, Perpetual contractGoing short means taking a position that profits when the price falls, by selling to open and buying back later.
In derivatives you can short without owning the asset first. This symmetry, being as easy to short as to go long, is a main attraction of futures and perpetuals.
Read next: Course 2 Module 2; glossary: Short selling, Long positionNo. Most speculators close or roll the position before expiry rather than settling.
Closing offsets the contract for cash profit or loss; rolling moves the exposure to a later-dated contract. Holding a physically settled contract to expiry would obligate delivery of the actual asset.
Read next: Course 2 Module 2 and 7; glossary: Roll, ExpiryA funding rate is a periodic payment exchanged directly between long and short holders of a perpetual to keep its price near the index; when the perpetual trades above the index, longs pay shorts, and below it, shorts pay longs.
It replaces the expiry that anchors a dated future. The crowded side keeps paying the other side, which nudges the price back toward the underlying.
Read next: Course 2 Module 5 (Funding Rates); glossary: Funding rateNo. Funding flows between traders, from one side of the market to the other, not to the venue.
It is not a commission or a spread. It exists purely to keep the perpetual price anchored to the underlying index.
Read next: Course 2 Module 5; glossary: Funding rate, Index priceFunding is charged on the position's notional, so leverage multiplies it relative to your margin.
A 0.01 percent rate every 8 hours on $50,000 of notional is $5 per period, about $15 a day, or roughly $450 a month. On a small margin balance that can outweigh modest price gains.
Read next: Course 2 Module 5; glossary: Funding rate, Notional valueBecause a contract specification sets a size or multiplier, so one contract usually represents many units.
A standard gold futures contract is 100 troy ounces, a standard Bitcoin futures contract is 5 bitcoin, and a standard stock-index future is 50 dollars per index point. Always read the spec before trading.
Read next: Course 2 Module 7 (Reading Contract Specs); glossary: Contract size, MultiplierCash settlement pays the net price difference in cash; physical settlement delivers the actual underlying asset.
A stock index future is cash-settled because you cannot deliver an index, while a gold future can deliver metal. Speculators in physically settled contracts must close or roll before delivery.
Read next: Course 2 Module 2 and 7; glossary: Cash settlement, Physical settlementThe mark price is a contract's fair-value price, built from the index price, and it is used for your unrealized profit and loss, funding, and liquidations.
Because liquidations trigger off the mark price rather than the last trade, a brief price spike on one venue will not wrongly liquidate you. Always know which price your venue liquidates on.
Read next: Course 2 Module 3 (Perpetual Contracts); glossary: Mark price, Index price