Section I · The Japanese Candlestick Bible · Chapter 10
Trading plan and risk management
The five risk rules: how much to risk, how to calculate the lot size, a minimum of 1:2, where the stop goes and how to manage the open trade – plus a checklist.
Video lesson with voice-over and charts · 3 minEnglish subtitles
A perfect pattern without risk management is gambling. Professionals don't make money because they're always right – they make money because they lose little when they're wrong and make more when they're right.
Rule 1: Risk 0.5–2% per trade
Never risk more than 1–2% of your account on a single trade. That way even a streak of 10 losses in a row (which will happen!) won't destroy your account.
Rule 2: Calculate your position size
On XAUUSD, 1 standard lot = 100 ounces, i.e. a $1 move = $100 per lot. The formula is:
Example: account $10,000, risk 1% = $100. Stop-loss $5 below the hammer's low. Lots = 100 / (5 × 100) = 0.20 lots.
Rule 3: At least 1:2 risk/reward
If you risk $5, your target should be at least $10. With a 1:2 ratio you're profitable even if you're right in only 40% of your trades. If there's no room for 2R before the next level – skip the trade.
| Win rate | R:R 1:1 | R:R 1:2 | R:R 1:3 |
|---|---|---|---|
| 30% | −40R | −10R | +20R |
| 40% | −20R | +20R | +60R |
| 50% | 0R | +50R | +100R |
| 60% | +20R | +80R | +140R |
Table 10.1 – Result of 100 trades at different win rates and ratios (R = unit of risk)
Rule 4: The stop goes where the pattern is invalidated
The stop-loss isn't placed “at 20 pips” but where the idea is wrong. For a hammer – below the low of the wick. For an engulfing – beyond the extreme point of the two candles. For a star – beyond the star. If that stop is too big for the account – reduce the lot, not the stop.
Rule 5: Managing the open trade
- When you reach 1R – move the stop to breakeven (or partially close 50%).
- Trail the rest with a stop below the last low (for a long) or above the last high (for a short).
- A strong opposite pattern (e.g. a bearish engulfing while you're long) is an exit signal.
Checklist before every trade
- The higher-timeframe trend is identified
- The pattern is at a key level
- The candle has closed
- There is confirmation (next candle / indicator)
- No major news in the next 30 minutes
- The stop is beyond the invalidation point
- The target is at least 2R with no level in the way
- Risk is ≤1–2% and the lot size is calculated
- The trade is logged in the trading journal
Exercises
Test yourself on the chart
0 of 3 correct
1“Shooting Star”: you go short (sell) at the close. Where do you put the stop-loss?
Tap the chart where you would put the stop-loss.
2Account $10,000, risk 1%, stop $5 on XAUUSD. What's the lot size?
3The trade is at +1R. What do you do with the stop?
Key points
- Risk 0.5–2% of your account per trade.
- Lots = Risk in $ / (Stop in $ × 100) for XAUUSD.
- At 1:2 you're profitable even with a 40% win rate.
- The stop goes where the pattern is invalidated – reduce the lot size, not the stop.