Scaling Series: Risk Management

Summary

In this lecture, the focus is on risk management strategies tailored for both funded and personal trading accounts. The lecturer outlines three primary risk management protocols: basic, static, and exponential. Each protocol aligns with different goals: achieving consistent payouts for funded accounts, and growing personal accounts over time using the compound effect. The lecture emphasizes the importance of adapting risk management based on account type and trader experience, with advanced strategies allowing for more aggressive scaling of personal accounts while preserving capital. The session concludes with a look at how to apply these strategies in practical trading scenarios.

Takeaways

• 😀 The goal of **funded accounts** is to make payouts and withdraw profits, not to grow the account balance.
• 😀 The goal of **personal accounts** is long-term growth, achieved by compounding profits over time.
• 😀 **Risk management protocols** should differ based on whether you're trading funded or personal accounts.
• 😀 **Basic risk management protocol** involves risking a fixed dollar amount per trade, ideal for funded accounts.
• 😀 **Static risk management protocol** involves risking a fixed percentage (1-2%) of the account balance, best for personal accounts looking to compound.
• 😀 **Exponential risk management protocol** risks only profits from winning trades, allowing rapid scaling while preserving initial capital, ideal for advanced traders with personal accounts.
• 😀 The **compound effect** refers to reinvesting profits to accelerate growth, where small gains accumulate into larger returns over time.
• 😀 **Compounding is not used for funded accounts**, where the primary focus is achieving profit targets and withdrawing consistently.
• 😀 For **personal accounts**, compounding is crucial to grow the account over time by progressively increasing risk as the account size grows.
• 😀 The **exponential risk management protocol** is advanced and requires careful monitoring, as it scales risk during winning streaks but resets after losses.
• 😀 The **static risk management protocol** offers steady, predictable growth, making it suitable for beginner to intermediate traders in personal accounts.

Q & A

What is the main difference between trading funded accounts and personal accounts?

Funded accounts focus on earning consistent payouts and withdrawing profits without trying to compound or grow the account. Personal accounts focus on long-term growth using compounding to scale capital over time.

Why is compounding not used in funded account trading?

Because the objective of a funded account is to secure payouts rather than grow the capital. Increasing risk as the account grows would violate the goal of stable withdrawals and may increase the chance of breaching funded account rules.

What is the compound effect and why is it important for personal accounts?

The compound effect occurs when profits are reinvested, causing returns to grow as account size increases. It is essential for personal accounts because it accelerates long-term capital growth.

What is the Basic Risk Management Protocol?

It involves risking a fixed dollar amount on every trade regardless of account changes. It is simple, avoids compounding, and is best for funded accounts where the goal is consistent payouts.

What is the Static Risk Management Protocol?

This method risks a fixed percentage of the current account balance, typically 1–2%. It allows gradual compounding and is best for beginner/intermediate traders growing personal accounts.

What is the Exponential Risk Management Protocol?

An advanced strategy that risks initial capital conservatively but increases risk dramatically during winning streaks by risking a percentage of profits from previous winning trades. It preserves initial capital while enabling rapid scaling.

Why is the exponential protocol considered more advanced?

Because risk fluctuates significantly based on recent trade outcomes, requiring emotional discipline, experience managing volatility, and strong understanding of win streak probabilities.

How does the basic protocol compare to the static and exponential protocols in profitability within the example?

In the simulation of 10 trades: Basic RM earned $1,800, Static RM earned about $1,933, and Exponential RM earned about $4,137 — showing progressively higher returns as compounding becomes more aggressive.

Why do funded traders benefit most from the basic protocol?

Funded traders must avoid account breaches and pursue stable profits. A fixed-risk approach minimizes variance, reduces large drawdowns, and aligns with the goal of hitting consistent payout targets.

What is the main objective of transitioning from funded to personal accounts?

The goal is to use funded accounts to obtain consistent payouts, gradually build personal capital, and eventually trade independently using compounding strategies for long-term financial sustainability.

How does the static risk protocol support psychological consistency?

By keeping risk a constant percentage, traders avoid large fluctuations in position size and maintain a predictable risk structure, helping to prevent emotional decision-making.

What triggers a reset in the exponential risk management protocol?

A losing trade resets the risk back to the base risk level (e.g., 1% of the account), ensuring only profits—not initial capital—were at higher risk.