Risk management determines how much capital is exposed when a trading idea is wrong. It is one of the most important foundations of a sustainable trading process.
Position Sizing
Position size should be connected to the amount a trader is willing to lose if the trade reaches its invalidation point.
Stop-Loss Planning
A stop can define where the original trade thesis is no longer valid. Its placement should be based on the strategy and market structure rather than an arbitrary distance.
Drawdown
Drawdown measures a decline from a previous peak in account value. Large losses require disproportionately larger gains to recover.
Correlation
Holding multiple positions does not necessarily create diversification. Highly correlated assets can produce concentrated exposure during market stress.
Final Thoughts
Risk management cannot eliminate losses, but it can help keep individual losses and overall drawdowns within manageable limits.