Risk and Psychology Lesson Pack
Here you'll find all 18 lessons of stage 3 on one page, each with its learning goal, class time, a question for discussion and the quiz answer for your preparation. You can start right away.
Why this pack
We consider stage 3 the most important of the whole course, because this is where it's decided who stays in the game for the long run. It covers position size, drawdown, the typical thinking traps and the trading journal. Recommended from age 15, more on the For teachers page.
Matching worksheet: Trading journal (fillable PDF): a direct match for the lesson of the same name in this stage.
How to use the pack: as 2 or 3 blocks of 45 minutes, for example first position size and key figures, then leverage and liquidation, then psychology. Or as 18 short openers of 10 to 15 minutes over several classes.
The 18 lessons
1. Capital preservation before profit
Learning objective: After this lesson you can explain why preserving your capital matters more than the highest return.
Class time: about 5 min. (1 min. reading + discussion)
Discussion question: Why can't a total loss be made up with high returns?
Show quiz answer key (for prep)
Situation: You lost 40% of your account in one year. A friend says a good year afterward would easily make up for it. What is he missing?
Correct answer: He needs about 67% return to get back to the starting value. Why: Going from €6,000 back to €10,000 takes about 67%. That's why preserving capital is the precondition for any further return.
2. The one-percent rule
Learning objective: After this lesson you can apply the one percent rule to a position of your own.
Class time: about 6 min.
Discussion question: What exactly does the one percent rule limit?
Show quiz answer key (for prep)
Situation: Your account holds €20,000. For one trade you are willing to lose €800 at most if your stop-loss triggers.
Correct answer: That is 4% of the account and clearly exceeds the usual one-percent limit. Why: €800 is 4% of €20,000. A losing streak would hurt this account far faster than a one-percent position.
3. Calculating position size
Learning objective: After this lesson you can calculate your position size from the allowed loss and the distance to your stop instead of guessing it.
Class time: about 5 min.
Discussion question: What's the basic formula for the number of shares?
Show quiz answer key (for prep)
Situation: Account: €10,000. Allowed risk: 1% (€100). Entry at €50, stop-loss at €48: a distance of €2.
Correct answer: 50 shares, because €100 allowed loss divided by €2 distance equals 50. Why: Position size = allowed loss divided by stop-loss distance. That keeps the maximum loss at €100 regardless of the price level.
4. Risk-reward ratio
Learning objective: After this lesson you can calculate the reward to risk ratio of a position and judge whether a strategy is viable.
Class time: about 5 min.
Discussion question: What win rate does a three to one ratio need to break even?
Show quiz answer key (for prep)
Situation: A strategy wins only 30% of the time. But on winning trades, the average gain is five times the average loss.
Correct answer: Despite the low win rate, the favorable risk-reward ratio can make the strategy viable. Why: Even with only 30% winners, a 1-to-5 ratio more than makes up for the losing trades. That is what the expected value shows.
5. Win rate and expected value
Learning objective: After this lesson you can calculate a strategy's expected value from win rate, average gain and average loss.
Class time: about 5 min.
Discussion question: How do you calculate the expected value of a trade?
Show quiz answer key (for prep)
Situation: Win rate 40%, average win €300, average loss €150. Does this strategy hold up long-term?
Correct answer: Yes, positive: about +€30 per trade (0.4 × 300 − 0.6 × 150). Why: 0.4 × €300 = €120, 0.6 × €150 = €90. €120 minus €90 gives an expected value of +€30 per trade.
6. Drawdown
Learning objective: After this lesson you can calculate how much gain it takes to make up a given loss, and why that argues for limiting risk.
Class time: about 5 min.
Discussion question: What gain makes up for an 80 percent loss?
Show quiz answer key (for prep)
Situation: Your portfolio drops from €10,000 to €6,000 (−40%). How much return do you need from here to get back to €10,000?
Correct answer: About 67%, because the base after the loss is smaller. Why: €6,000 × 1.67 ≈ €10,000. The deeper the drop, the more disproportionately large the needed recovery.
7. Diversification
Learning objective: After this lesson you can judge whether a portfolio is really diversified or just made up of many similar positions.
Class time: about 5 min.
Discussion question: Which risk can be diversified away and which can't?
Show quiz answer key (for prep)
Situation: You hold ten different stocks. All from the semiconductor sector.
Correct answer: This is barely diversification, because the holdings move similarly on sector news. Why: Diversification only works when the components behave differently. A sector headline here would hit almost the whole portfolio at once.
8. Leverage
Learning objective: After this lesson you can calculate which price drop wipes you out at a given leverage.
Class time: about 5 min.
Discussion question: At what price move is your stake gone at leverage 25?
Show quiz answer key (for prep)
Situation: You open a leveraged position at 20x.
Correct answer: A 5% move against you is enough to wipe out your entire stake. Why: 100 divided by 20 is 5%. That is exactly the move needed for a total loss.
9. Liquidation
Learning objective: After this lesson you can explain when and why a leveraged position is closed automatically.
Class time: about 6 min.
Discussion question: Why is the actual liquidation threshold closer to the entry than one divided by leverage?
Show quiz answer key (for prep)
Situation: Your leveraged position is approaching the liquidation threshold.
Correct answer: Liquidation happens automatically once margin runs out, whether or not you are watching the screen. Why: The provider force-closes the position without asking, often at the worst possible moment.
10. CFDs, and why regulators warn about them
Learning objective: After this lesson you can explain why CFDs count as leveraged products and why regulators warn against them.
Class time: about 5 min.
Discussion question: What do you own when you buy a CFD?
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Situation: CFD providers are required to disclose what share of their retail clients lose money trading CFDs.
Correct answer: The figure is usually around 65 to 80 percent. Why: These figures are publicly disclosed by providers. The values differ by provider and are updated quarterly.
11. Fear and greed
Learning objective: After this lesson you'll recognize how fear and greed distort your own buying and selling decisions.
Class time: about 5 min.
Discussion question: Why don't good resolutions hold in a crisis?
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Situation: Prices have risen for months and the mood is euphoric. Soon after, a crash and panic-selling follow.
Correct answer: Fear and greed typically make people buy near the top and sell near the bottom. Why: Greed drives late entries during euphoria, fear drives exits deep into panic. Both at the worst possible time.
12. FOMO
Learning objective: After this lesson you'll recognize FOMO in your own buying decision before it makes you get in at the worst time.
Class time: about 5 min.
Discussion question: Why do you almost always get in late with FOMO?
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Situation: A price has jumped 80% in a few days. You only just heard about it and want to jump in quickly.
Correct answer: This is a classic FOMO signal. The move is often nearly over by the time it stands out. Why: FOMO tends to trigger entries right when a move is almost finished: the worst possible timing.
13. Loss aversion
Learning objective: After this lesson you can explain why loss aversion makes you hold losers too long and winners too briefly.
Class time: about 5 min.
Discussion question: What does prospect theory say about losses?
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Situation: You have been holding a losing position long past where your plan called for an exit. Meanwhile you sold a winning position far too early.
Correct answer: This is loss aversion: losses hurt more than equally sized gains feel good. Why: This exact imbalance is why losers get held too long and winners get sold too early.
14. Confirmation bias
Learning objective: After this lesson you'll recognize confirmation bias in yourself and know how to counter it.
Class time: about 5 min.
Discussion question: Where does confirmation bias work?
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Situation: Ever since you bought a stock, you only read positive news about it and tune out warning signs.
Correct answer: This is confirmation bias. It systematically distorts your judgment in your own favor. Why: Anyone holding a position unconsciously seeks out supporting information and overlooks the opposite. The market punishes that reliably.
15. Overtrading and revenge trading
Learning objective: After this lesson you'll recognize overtrading and revenge trades in yourself before they empty your account.
Class time: about 6 min.
Discussion question: Why is the revenge trade the opposite of what makes an account grow?
Show quiz answer key (for prep)
Situation: Right after a losing trade, you open a new, bigger position to make the loss back quickly.
Correct answer: This is revenge trading. One of the most dangerous forms of overtrading. Why: Revenge trading after a loss adds fees, creates new mistakes, and regularly wipes out entire accounts.
16. The trading journal
Learning objective: After this lesson you can keep a trading journal that honestly shows your real performance.
Class time: about 5 min.
Discussion question: What is outcome bias?
Show quiz answer key (for prep)
Situation: You are convinced you are trading profitably overall, but you mostly remember your winning trades.
Correct answer: Only a trading journal shows your real performance, because memory overrates winners. Why: Without records you remember the winners and forget the losers. The journal is the only reliable way to see your actual results.
17. When to stop
Learning objective: After this lesson you'll recognize the signs on which you can base a sensible decision to stop.
Class time: about 6 min.
Discussion question: Why are past losses no reason to carry on?
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Situation: You have repeatedly traded against your own trading plan and lost money doing it.
Correct answer: This is a clear signal to pause or stop. Continuing no longer has a reasonable expected value. Why: Stopping is not a defeat, it is a normal decision when your own rules keep getting broken.
18. Mark price and margin modes
Learning objective: After this lesson you can explain why the mark price decides liquidation and what isolated and cross margin mean for your risk.
Class time: about 5 min. (2 min reading + discussion)
Discussion question: Why was I liquidated although the price never reached my liquidation price?
Show quiz answer key (for prep)
Situation: Your leveraged position is running in cross-margin mode and is getting close to its liquidation threshold. You still have free balance on the account.
Correct answer: In cross mode, the free balance gets pulled in too, letting the position survive longer, but also putting more at risk if it goes wrong. Why: Cross margin extends a position's life because the full balance backs it. If it goes wrong, the whole account can be affected, not just this one position.
After this pack
Direct continuation into Stage 4 (Analysis) under Understanding investing. This stage is also a good moment to lock in the trading-journal habit in the paper-trading simulator, if that hasn't happened yet.