The Trader's Armor: Risk Management and Position Sizing with Oliver Velez

The Non-Negotiable Rules of Risk Management

For Oliver Velez, risk management is not just a suggestion; it is a non-negotiable rule. The first rule of trading is to protect your capital. Without capital, you cannot trade. Velez has a set of rules that he lives by. First, never risk more than 2% of your trading capital on a single trade. Second, always use a stop-loss. Third, know your exit point before you enter a trade. These rules are the foundation of a successful trading career.

Calculating Position Size

Position sizing is the key to controlling risk. The size of your position should be determined by the distance between your entry price and your stop-loss price. The formula is simple: Position Size = (Total Trading Capital * Risk per Trade) / (Entry Price - Stop-Loss Price). For example, if you have a $50,000 trading account and you are willing to risk 2% on a trade, your risk per trade is $1,000. If you want to buy a stock at $50 with a stop at $48, your position size would be $1,000 / ($50 - $48) = 500 shares.*

Placing Effective Stops

A stop-loss is your insurance policy. It is the point at which you admit that you are wrong and exit the trade. A stop-loss should be placed at a logical level, not an arbitrary one. Velez teaches traders to place their stops below key support levels or recent swing lows. For a long position, a stop might be placed below the 20-period EMA. For a short position, a stop might be placed above the 20-period EMA.

The 2% Rule and Its Application

The 2% rule is the cornerstone of Velez's risk management philosophy. It ensures that no single trade can wipe out your account. By risking only 2% of your capital on each trade, you can withstand a string of losses and still have enough capital to continue trading. This rule forces you to be selective in your trades and to only take high-probability setups.