Table of Contents
Michael Toma—author of The Risk of Trading and a veteran risk manager—joins a YouTube interview to cut through the noise on what actually keeps traders alive in volatile markets. He’s not here for theory; he’s here to show why survival, proper position sizing, and plan discipline matter more than hot takes or flashy setups. If you’ve ever wondered why your equity curve looks like a rollercoaster or why “just risk 1%” isn’t the full story, this conversation is your wake-up call.
In this piece, you’ll learn Michael Toma’s practical framework for risk—how to think beyond single trades, set size so “risk of ruin” stays near zero, and use plan compliance and profit factor to judge whether your strategy truly has an edge. You’ll also see how he approaches prop-firm requirements, correlation traps (like stacking USD/JPY exposure), and why journaling is non-negotiable if you want steady growth. By the end, you’ll have a simple, durable playbook to protect capital, smooth your equity curve, and trade with confidence—not luck.
Michael Toma Playbook & Strategy: How He Actually Trades
Core Philosophy: Protect the Account, Then Grow It
Before chasing returns, Michael focuses on survival—because compounding only works if you’re still in the game. This section lays out the non-negotiables that keep risk of ruin tiny and confidence high.
- Never risk more than 0.25%–0.75% of equity per trade; default to 0.5% until stats justify more.
- Cap total daily loss at 1%–1.5% of equity; stop trading for the day when hit.
- Cap weekly loss at 3%–4%; stand down for the rest of the week when reached.
- Use a hard max open risk: total live trades’ risk ≤ 1.5%–2.0% of equity at any time.
- No revenge trades; a losing day cannot be “won back” with size.
Position Sizing: Risk of Ruin Near Zero
Sizing is mechanical, not emotional. Here’s how to translate a stop distance into shares/contracts so that one loss is just a paper cut.
- Position size = (Account * %Risk) ÷ Stop distance (in $ per unit).
- Round down to the nearest lot size; never round up.
- If size exceeds max leverage or margin comfort, skip the trade.
- For prop rules, use the lower of your personal risk cap or the firm’s rule when sizing.
- If volatility doubles (ATR, true range), halve your size automatically.
Entry Criteria: Only Take Trades With Positive Expectancy
Edge means repeatable conditions that, over many trials, produce more than they cost. This section turns “I like this setup” into a checklist.
- Trade only A-setups you’ve logged with a win rate ≥ 45% and PF (profit factor) ≥ 1.3.
- Require confluence: bias (trend/structure), location (support/resistance/Value Area), and trigger (break/retest or rejection).
- If spread > 20% of stop size, skip—costs will eat expectancy.
- News within 30 minutes of entry? Stand aside unless your stats show it helps.
- No second chance if the first entry rules weren’t met—wait for a fresh setup.
Stop Placement: Define Risk First, Not After
Stops live at the point that proves the idea wrong, not at a P&L number. The bullets below force clarity before clicking buy/sell.
- Place the stop beyond invalidation: below swing low/structure for longs; above for shorts.
- Minimum stop distance = recent ATR fraction (e.g., 0.5–1.0 ATR on your timeframe).
- Move to breakeven only when your plan’s trigger is hit (e.g., +1R close, structure break).
- Never widen a stop. If volatility expands beyond plan, exit and reassess.
- One manual override allowed per week—must be documented with a reason.
Take-Profit & Trade Management: Let Winners Pay the Bills
You don’t get paid by being right; you get paid by getting paid. Here’s how to harvest gains without letting emotions run the show.
- Initial target = at least 1.8R–2.5R; skip trades that cannot fit ≥ 1.5R after costs.
- Scale out no more than twice; each scale reduces the remaining risk proportionally.
- Trail only on structure (higher lows/lower highs) or ATR; never on P&L alone.
- If momentum stalls at the HTF level, take partial and tighten to the last swing.
- End-of-day hard flatten for intraday systems; swing systems must have overnight rules.
Correlation & Exposure: Don’t Stack the Same Bet
Different tickers can still be the same trade. This section keeps you from doubling risk by accident.
- Count correlated instruments as one bucket (e.g., EURUSD + GBPUSD); risk per bucket ≤ 0.8%–1.0%.
- Max 2 positions per macro theme (e.g., “USD strength”), unless hedged.
- If two signals fire in correlated names, take the higher-quality one; pass on the other.
- Use a heat-map (manual is fine): sum of bucket risks ≤ total open risk cap.
- No pyramiding into correlated trades to “average up”—size the first one right.
Volatility Filters: Trade When the Market Pays You
Volatility is the rent you charge the market for taking risk. These rules help you avoid dead chop and chaotic whipsaws.
- Trade only when realized intraday range ≥ 70% of 20-day average (or your backtested threshold).
- If the spread/ATR ratio is above your max (e.g., > 0.15), skip.
- On event days (CPI, NFP, rate decisions), trade the second move, not the first spike.
- Reduce size by 50% in the first 30 minutes after major news.
- No new trades in the final 15 minutes unless you’re an intraday closer with stats.
Plan Compliance Score (PCS): Grade the Trader, Not the Trade
Winning while breaking rules is dangerous. PCS keeps you honest and shows whether you’re executing the edge.
- For each trade, score 0–100 across: setup validity, sizing accuracy, stop/TP discipline, and emotional control.
- Record trades with PCS ≥ 80 as “compliant”; review non-compliant trades regardless of P&L.
- If weekly PCS < 75, reduce per-trade risk by 50% next week.
- Only increase size after 4 consecutive compliant weeks and net PF ≥ 1.5.
- Keep a visible PCS dashboard to remove guesswork.
Metrics That Matter: Make Edge Measurable
Data beats opinions. Track the few numbers that predict staying power and scale-ability.
- Profit Factor (gross wins ÷ gross losses) target ≥ 1.4; stop system changes if PF < 1.2 for 40 trades.
- Win Rate target per setup; improve R multiple when win rate dips.
- Average R per trade ≥ +0.2 over 100-trade windows before any size increase.
- Max Drawdown allowed: 8%–12%; hard stop-out for system review at the limit.
- Time-to-recovery (days to new equity high) ≤ 50% of drawdown days.
Prop-Firm & Risk Limits: Pass Without Gambling
Rules are tighter when daily losses and trailing drawdowns are enforced. This section adapts the playbook to those constraints.
- Set a daily stop at 80% of the firm’s max daily loss to avoid accidental breaches.
- Use half-size on day one and after any red day.
- Flatten if equity sits within 1R of the daily loss limit.
- Avoid holding onto news that can push you past hard limits.
- Withdraw or secure a payout only after two calm, rule-compliant cycles.
Pre-Trade Routine: Prepare Like a Pro
Preparation is the cheapest edge you’ll ever find. Keep it short, consistent, and focused on what moves your market.
- Mark higher-timeframe trend, key levels, and liquidity zones before the session.
- Define the one or two A-setups you’ll allow today and write them in plain English.
- Pre-compute size for typical stop distances so clicks are mechanical.
- Set alerts at levels; don’t babysit candles.
- Commit to a maximum number of trades (e.g., 3–5) to avoid churn.
Post-Trade Review: Turn Mistakes Into Playbook Rules
Review is where the craft sharpens. Two paragraphs of notes can save months of pain.
- Immediately tag the outcome by setup type, PCS, and R multiple.
- Screenshot entry/exit with annotations; note what would make it an A+ next time.
- Log the emotional state (1–5); persistent 4–5 requires a break or size cut.
- Every Friday, update PF, win rate, avg R, and draw your equity curve.
- Convert repeated mistakes into a new rule and pin it to next week’s plan.
Size Like a Pro: Keep Risk Tiny, Survive Every Drawdown
Michael Toma hammers one idea home: tiny, consistent risk keeps you alive long enough for the edge to show up. If your default per-trade risk is a fixed sliver of equity—think 0.25% to 0.75%—a single loser is just a paper cut, not a crisis. He stresses that size is a math problem, not a mood, so you calculate it from your stop distance before you even think about clicking buy or sell. That way, one bad candle never becomes a bad week.
Toma also pushes guardrails that stop the tilt before it starts. Daily and weekly loss caps shut the platform when you’re off your game, preserving capital and confidence. He wants you to round position size down, never up, and to auto-shrink size when volatility spikes so your R stays stable. Follow those rules and your drawdowns stay small, recovery times get shorter, and the compounding engine can finally do its job.
Let Volatility Lead: Adjust Position Size When Markets Speed Up
Michael Toma treats volatility like a dimmer switch for risk, not a surprise that ruins trades. When ATR or true range expands, he cuts position size so the same stop distance risks the same fraction of equity. If volatility contracts, he allows size to scale up—but only within pre-set caps to avoid creeping leverage. The goal is a stable R across regimes, which keeps outcomes consistent and emotions quiet.
Toma also ties entries to volatility context, so your stops live outside normal noise. He prefers pre-computing sizes for common ATR multiples, so the math is done before the candle moves. If a news event or session opens and sends realized range soaring, he trades smaller or waits for the range to normalize. By letting volatility lead, he keeps expectancy intact while other traders get whipsawed by the same market.
Diversify Smartly: Spread Bets by Theme, Duration, and Strategy
Michael Toma warns that holding five tickers doesn’t mean you’re diversified if they’re all the same macro bet. He groups trades into “themes” (like USD strength or risk-on equities) and caps risk per theme so one narrative can’t sink the week. He’ll choose the highest-quality setup within a theme and pass on the look-alikes, which keeps correlation from silently doubling his exposure. Duration matters too: mixing intraday, swing, and position trades smooths the equity curve because different time frames pay at different times.
Toma also diversifies by playbook, not just product, so a breakout system doesn’t compete with a mean-reversion or trend-pullback system for the same capital. If two strategies start drawing down together, he cuts the size of the weaker one until the profit factor recovers. He avoids pyramiding correlated names to “average up,” preferring a single, properly sized position with clear add rules. And when volatility clusters, he keeps total open risk under a hard cap so diversification doesn’t turn into overexposure dressed up as variety.
Trade the Mechanics: Rules, Stops, and Profit Targets Beat Predictions
Michael Toma treats forecasting as optional, execution as mandatory. His edge lives in mechanics: predefined entry criteria, a hard stop at invalidation, and profit targets chosen for positive expectancy. Before entry, he scripts the full path—size, stop, scale levels, exit conditions—so there’s no guessing mid-trade. If any box isn’t checked, the trade is skipped, because undisciplined entries poison the statistics.
Once in, Toma manages by rules, not feelings: no widening stops, move to breakeven only after a specific milestone, and trail on structure or ATR—not on P&L anxiety. Profit-taking is systematic: partial at first to target pay risk, then let the remainder ride with a rules-based trail. If the market invalidates the thesis or momentum stalls at a higher-timeframe level, he exits without negotiating. By prioritizing mechanics over prediction, Michael Toma turns every trade into a repeatable process that survives randomness and compounds edge.
Define Your Risk: Plan Compliance, Daily Limits, and No Revenge
Michael Toma is relentless about defining risk before the trade and policing behavior after it. He uses daily and weekly loss limits as hard guardrails—hit the number, stop trading—because the first job is capital preservation. To keep execution honest, he tracks a plan compliance score that grades each trade on setup validity, sizing accuracy, stop discipline, and emotional control. If compliance drops, size drops; only sustained, rule-perfect execution earns a size increase.
Toma views revenge trading as account sabotage in disguise. After a red day, he reduces risk, shortens his playbook to only A-setups, and requires a cool-off before the next entry. He documents any rule breaks and converts repeat offenses into explicit rules, so the playbook gets stricter where he’s historically weak. By combining pre-defined limits with a measurable compliance process, Michael Toma turns discipline into a system—one that protects equity, shortens drawdowns, and keeps the compounding engine running.
Michael Toma’s big message is simple: trade like a risk manager first, trader second. He wants your journal to be a living risk map, not a scrapbook—because that’s where you spot the habits that quietly drain the account. Keep per-trade risk tiny, pre-compute size from the stop, and decide limits before the bell: daily and weekly max loss, total open risk, and a hard “no” to revenge trades. Treat volatility like a knob on the console—when ranges expand, size contracts—so one wild session never hijacks the equity curve.
He also pushes mechanics over predictions. Define invalidation, place the stop there, and set profit targets that give positive expectancy; then manage by rules, not feelings. Grade every trade with plan compliance, track profit factor to confirm edge (aiming for a sustainable “sweet spot,” not a flashy outlier), and watch correlation so five charts don’t secretly represent one macro bet. For prop-style constraints, operate well inside the lines: smaller size after red days, avoid news that can gap past limits, and prioritize consistent rule execution over hero trades. Do that, and the curve smooths, drawdowns shorten, and your process—not luck—does the heavy lifting.
