Overview
The practice of defining, limiting, and managing downside exposure in trading and investing. Often the difference between traders who survive long-term and those who don’t.
Key Concepts
- Logic-based stops vs. percentage-based stops — placing stops at structurally significant price levels (where the thesis is invalidated) outperforms arbitrary percentage-based risk rules
- Position sizing — size follows from stop placement; determine invalidation point first, then calculate position size based on acceptable dollar risk
- Risk/reward ratio — a trade should only be taken if the potential reward justifies the risk being taken; minimum 1:2 is a common benchmark
- Emotional risk — moving stops, exiting early, averaging down on losing positions are behavioural failures that compound financial risk
Synthesis
Page scaffolded — will expand as trading resources are consumed.
Self Development connection
Risk management is applied uncertainty tolerance. The same principle — define your downside before you commit, size exposure to what you can actually absorb — applies to business decisions, investments of time, and major life choices.
Related
- Topics: Technical Analysis · Commodity Markets
- Resources: Stop Losses DON’T Work (Do This Instead)