Section
Risk Management
The part of trading that decides whether you are still trading next year: how much each position can lose, how much all of them can lose together, and when to stop.
Risk is decided before the order goes in. The stop says where the idea is wrong, the account says how many dollars you accept losing there, and the share count falls out of those two numbers. Everything after the fill is execution.
Losses and gains are not symmetrical, which is the arithmetic behind every drawdown rule. A 20% loss needs a 25% gain to recover, and a 50% loss needs 100%. The loss recovery calculator shows the gain needed from any drawdown, and the position size calculator turns a stop and a risk percentage into shares, including the loss if the stock opens past the stop.
Free courses
All courses →Beginner · free
Nobody Rebuilds From Zero: Risk Rules That Protect Trading CapitalTraders who pick entries carefully but size positions by feel, and want written rules for how much to risk and when to cut back.
Columns
All columns →Ledger
A 50% Loss Needs a 100% Gain, and That Should Change Your RulesLosses cost more to repair than they cost to take, so set a maximum drawdown and cut size well before the hole gets deep.
Argument
Conviction Makes a Terrible Position SizeSize every trade from the account and the stop, and treat conviction as a reason to take the trade, never as a reason to make it bigger.
Argument
Graham's Margin of Safety, Rebuilt for a Trading AccountBuild a trader's margin of safety from wide enough stops, a cap on total open risk and unused buying power, and accept the lower returns it costs.
Answers
Concepts
- Maximum drawdown
The largest percentage fall in an account's value from a peak to a subsequent low before a new peak is reached, measured over a given period.
Quizzes
- Down 50%, Up 100%: A Loss Recovery Math Quiz
Whether you can work out the gain needed to recover a loss, follow a string of returns in dollars and see what leverage and averages do to the result.
- Poke a Hole in the Plan: A Trading Plan Quiz
Whether you can find the flaw in a written trading plan: stops, size, total open risk, sector bunching, targets, event dates and risk per trade.
- Proven Wrong: A Quiz on Invalidation and Stop Placement
Whether you can place a stop where the trade idea is proven wrong, by price, close, news or time, and keep it above the margin call price.
- Skill or Dumb Luck? A Quiz on Judging Trading Decisions
Whether you can grade a trade on its process instead of its outcome, measure results in R and tell a real record from a short run of luck.
Calculators
- Loss Recovery Calculator
The gain needed to get back to even after a loss, and the balance after a run of losing and winning trades.
- Position Size Calculator
Shares from your account risk and stop, the reward in R, and the loss if the stock opens past the stop.