Risk Management

Techniques and concepts for managing trading risk.

22 terms in this category

A

Anti-Martingale Strategy

Anti-Martingale Strategy is a position-sizing method that increases exposure after wins and reduces it after losses, compounding gains while capping max loss at the original risk.

C

Consecutive Losses

Consecutive losses is a sequence of back-to-back losing trades with no winner between them — a statistical inevitability for any win rate, not a sign of system failure.

Correlation

Correlation measures how closely two assets move together, ranging from +1 (perfect positive) to -1 (perfect negative), crucial for portfolio diversification.

D

Diversification

Diversification spreads investments across different assets, sectors, or strategies to reduce the impact of any single position's loss on the portfolio.

F

Fixed Fractional Position Sizing

Fixed fractional position sizing is a risk method where a trader risks a constant percentage of current account equity on every trade, scaling exposure automatically with account growth or loss.

H

Hedging

Hedging is a risk management strategy that takes offsetting positions to protect against adverse price movements in existing holdings.

L

Leverage

Leverage allows traders to control larger positions with less capital, amplifying both potential profits and losses from price movements.

M

Margin

Margin is borrowed money from a broker used to increase buying power, requiring traders to maintain a minimum equity percentage in their account.

Margin Call

A margin call occurs when account equity falls below the minimum maintenance requirement, requiring the trader to deposit more funds or close positions.

Max Loss Per Day

Max loss per day is a pre-set daily threshold at which a trader stops all trading once cumulative losses reach a defined dollar or percentage limit.

O

Overnight Gap Risk

Overnight gap risk is the chance a security opens significantly higher or lower than its prior close due to after-hours news, leaving traders unable to exit at intended prices.

P

Portfolio Heat

Portfolio heat is the total percentage of account equity at risk across all simultaneously open positions, measuring aggregate exposure beyond any single trade's risk.

Position Sizing

Position sizing determines how much capital to allocate to each trade based on account size, risk tolerance, and stop loss distance.

R

Risk Budget

Risk budget is a top-down framework that caps total portfolio risk across all open positions, setting explicit limits at the per-trade, account, and daily loss level.

Risk of Ruin Formula

Risk of Ruin Formula is a mathematical calculation that determines the probability a trader loses their entire capital given win rate, edge, and position size.

Risk Per Trade

Risk per trade is the maximum amount of capital a trader is willing to lose on any single trade, typically 1-2% of total account value.

Risk-Reward Setup

A risk-reward setup defines the entry, stop loss, and target levels of a trade, ensuring the potential reward justifies the risk before entering.

S

Stop Loss

A stop loss is a predetermined price level at which a trade is automatically closed to limit potential losses on a position.

T

Take Profit

A take profit order automatically closes a position when price reaches a predetermined profit target, securing gains without manual intervention.

The 2% Rule

The 2% Rule is a position-sizing guideline that limits risk to no more than 2% of total account equity on any single trade.

Trailing Stop

A trailing stop is a stop loss that moves with price in the direction of the trade, locking in profits while still allowing the trade room to run.

V

Value at Risk (VaR)

Value at Risk (VaR) is the maximum expected portfolio loss over a given time period at a specified confidence level, such as a 1-day 95% VaR of $1,200.