Money Management for Traders: a System of Five Written Rules
Money management as five written, checkable rules — per-trade risk, portfolio heat, a daily stop, a drawdown step-down, and a weekly review — with the arithmetic for each.
A system, not a feeling
Money management fails as an attitude and works as a short list of written rules — each one checkable with arithmetic before a trade, each one decided on a calm day for use on a bad one. Five rules cover most of what matters.
- Per-trade risk cap: a fixed percent of equity, all-in with costs.
- Portfolio heat cap: a ceiling on the sum of open risk across positions.
- Daily stop: the loss at which today ends, decided before today.
- Drawdown step-down: a defined equity level at which size halves.
- Weekly review: the record read against the rules, on a schedule.
Portfolio heat and the correlation trap
The per-trade cap is the famous rule; the heat cap is the one that saves accounts. Five open positions at 1% each is 5% of equity at risk — and if the positions are correlated, it is closer to one 5% trade than five independent 1% trades. Crypto pairs against the same market, or three currency pairs sharing a dollar leg, routinely move together on the day it matters.
The arithmetic is a sum, not a model: add the planned losses of everything open. If the total breaches your heat cap, the next trade needs a smaller size or a pass, however good it looks alone.
The daily stop and the step-down
A daily stop converts one bad day into a bounded number — the same idea prop firms enforce, applied voluntarily. It works for a specific reason: after consecutive losses, decision quality is at its worst exactly when the urge to win it back is strongest. A stop decided in advance removes that decision from the person least equipped to make it.
The step-down does the same across a longer horizon: at a defined drawdown — say 10% — size halves until equity recovers a defined level. Halving size at 10% down means each further loss is smaller in dollars, flattening the curve precisely where the recovery asymmetry starts to bite.
Write them down, then check against them
None of these rules is exotic; what makes them a system is that they are written, numeric, and checked — not remembered, vague, and negotiated in the moment. A rule that lives in your head is renegotiated by whoever you are at your worst hour. A written rule checked before entry is a constraint. The entire discipline is that difference.
Run the numbers yourself
Check the next trade against written rulesCommon questions
What should the daily stop be relative to per-trade risk?
A common structure is two to three times the per-trade cap — enough room for a normal run of losses, small enough that one day cannot do a week of damage. At 1% per trade, a 2–3% daily stop means two or three full losses end the day. The exact multiple matters less than its existence in writing.
How do I count heat for hedged or opposing positions?
Count planned losses, not directions. Two opposing positions can both hit their stops in a whipsaw, so netting their risk assumes an orderliness the market does not owe you. The conservative sum — every stop hit — is the number that cannot surprise you.
Is this different for a prop account?
The structure is identical; the numbers must fit inside the firm's. Your daily stop belongs below the firm's daily cap with room for costs, and your heat cap below the drawdown buffer. A personal system stricter than the firm's rules is what makes the firm's rules stop mattering.
Maximelion is decision support, not financial advice. It does not predict markets, recommend trades, or guarantee outcomes. All figures on this page are arithmetic examples, not recommendations.