QuantSchool: Capital management principles

Core Fundamentals

Effective capital management preserves your trading account while allowing for growth. These principles apply to all market participants.

Essential Rules

1. The 1% Rule

• Risk maximum 1% of total capital per trade
• Allows survival through losing streaks
• Example: $50,000 account = $500 risk/trade

2. Portfolio Allocation

• Divide capital into core positions (60%) and trading positions (40%)
• Never commit 100% to the market
• Maintain cash reserves for opportunities

3. Position Scaling

• Start small with new positions
• Add to winners, not losers
• Use pyramiding for strong trends

Risk Control Framework

Capital Preservation Techniques

• Diversify across uncorrelated assets
• Rebalance portfolio quarterly
• Use separate accounts for different strategies
• Withdraw profits periodically

Common Pitfalls

• Overconcentration in single positions
• Revenge trading after losses
• Ignoring correlation between assets
• Failing to adjust for changing volatility

Implementation Checklist

1. Calculate maximum risk per trade
2. Determine sector allocation limits
3. Set daily/weekly loss limits
4. Establish profit-taking rules
5. Schedule regular portfolio reviews

Disciplined capital management enables traders to survive mistakes and compound gains over time. By following these principles consistently, you protect your account while maintaining growth potential.