Risk Management 101
Returns matter, but survival matters more. Risk management helps you avoid the kind of loss that forces you to quit or makes it psychologically impossible to continue.
1) Position Sizing
Position sizing determines how much you allocate to a trade or investment.
A Simple Rule of Thumb
Many traders aim to risk 1–2% of their account on a single trade.
``` Risk per trade = Account Value × Risk % Position size = Risk per trade / (Entry - Stop) ```
The more volatile the stock, the smaller the position should generally be.
2) Stop-Losses
A stop-loss is a pre-defined exit level that limits downside.
Good Stops Are:
- Based on structure (support levels, invalidation points)
- Set before you enter
- Paired with position sizing
Common Mistakes
- Setting stops too tight (getting “noise” stopped)
- Moving stops lower without a plan
- Not sizing properly and relying on hope
3) Drawdowns and Recovery Math
Drawdowns hurt more than people realize because recovery is not linear.
- Down 10% → need +11% to recover
- Down 25% → need +33%
- Down 50% → need +100%
Avoiding large drawdowns is often more important than maximizing upside.
4) Diversification and Correlation
Diversification works best when assets are not perfectly correlated. In a crisis, correlations often rise — so don’t assume everything will protect you.
5) A Practical Checklist
- Where is my invalidation level?
- What is my maximum loss in dollars?
- Does the position size match that risk?
- What is my plan if the trade works?
- What is my plan if the trade doesn’t work?
Conclusion
Risk management is not about being conservative — it’s about consistency. A strategy that avoids catastrophic losses has the time and emotional stability required to compound.