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Risk and portfolio

Risk management

Deciding in advance how much can be lost on any position and on the portfolio, and sizing accordingly.

The core discipline is position sizing. Fixing the loss you will accept per trade, commonly one or two per cent of capital, and deriving the size from the distance to your invalidation level, means no single mistake can end the account.

It matters more than accuracy. A system right forty per cent of the time with winners twice the size of losers compounds steadily; one right seventy per cent of the time with occasional unlimited losses does not survive.

The rules only work if they are set before the position exists. Decisions made while a trade is losing are made by a different person than the one who opened it, which is the entire argument for writing them down in advance.

Also known as: position sizing · risk per trade · money management

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Educational definition. It is not investment advice and not a recommendation about any particular instrument.