Set 6 — Risk Management, Prop Firm Rules, and Backtesting

What is risk per trade?

The dollar amount or R amount you are willing to lose if the stop is hit.

What is account risk?

The total amount of drawdown the account can tolerate before serious damage or failure.

What is daily loss limit?

The maximum amount allowed to be lost in one day before trading must stop.

What is max drawdown?

The maximum decline allowed in the account before it is considered failed or blown.

What is trailing drawdown?

A loss threshold that rises as account balance rises, making discipline especially important early.

What is R?

A unit of risk based on the size of your stop-loss.

What is 1R?

One full predefined unit of risk on a trade.

What is 2R?

A profit equal to two times the amount risked.

What is 0.5R?

Half of the amount risked.

What is reward-to-risk ratio?

The amount targeted relative to the amount risked.

What is expectancy?

The average amount a strategy is expected to make or lose per trade over time.

What is the expectancy formula?

(Win rate x average win) minus (loss rate x average loss).

Why is win rate alone not enough?

Because strategy profitability also depends on win size, loss size, fees, and execution.

What is overtrading?

Taking too many trades, often outside plan or out of emotion.

What is normal variance?

The normal run of wins and losses that occurs even in a valid strategy.

What is strategy failure?

A pattern showing the setup no longer has edge or was never valid to begin with.

Why should you know your likely losing streak?

Because it helps size safely and prevents emotional overreaction.

Why are prop firm rules so important?

Because violating them can fail the account even if your market idea was good.

Why should you know the exact rules before buying an eval?

Because account type, drawdown model, daily limits, and payout rules can change how you must trade.

Why is aggressive trading a trap in prop evaluations?

Because small buffers and rule constraints punish oversized mistakes quickly.

What is hindsight bias in backtesting?

Knowing what happened afterward and unconsciously using that knowledge in the test.

What is curve fitting?

Over-customizing a strategy to past data so it looks good historically but fails going forward.

What is sample size in trading?

The number of trades tested to evaluate whether a setup has real edge.

Why are 10 trades not enough?

Because the sample is too small to judge a strategy reliably.

What is forward testing?

Testing the strategy on live or current market data without hindsight.

What is replay testing?

Using past market data as if it were live to practice and evaluate rules.

What is the difference between a bad setup and bad execution?

A bad setup lacks edge; bad execution means the idea may have been fine but you entered or managed it poorly.

What should a trade journal track?

Setup, entry, stop, target, context, result, rule-following, and mistakes.

Why must each setup have its own dataset?

So you can measure whether that specific setup actually has edge instead of mixing results.

What is FOMO?

Fear of Missing Out, causing late or impulsive entries.

What is revenge trading?

Taking impulsive trades to make back a recent loss.

What is tilt?

Emotionally compromised trading after stress, losses, or frustration.

What is rule drift?

Gradually abandoning or changing rules midstream without proper testing.

What is confirmation bias in trading?

Only noticing information that supports your existing idea while ignoring contradictory evidence.

What is outcome bias?

Judging whether a trade was good only by result instead of whether it followed the plan.

What is recency bias?

Assuming recent market outcomes will keep repeating.

Why should you cap trades per day?

To protect yourself from emotional spirals and weak setups.

Why should you have a no-trade condition?

Because preserving capital is part of edge when conditions are poor.