Risk management limits the damage of bad trades. Position sizing — never risking more than 1–2% of your portfolio on a single trade — is crucial. Stop-loss orders automatically exit losing positions.
Answer: Determining how much capital to allocate to each trade. Position sizing controls risk — limiting each trade to a small percentage of total capital prevents catastrophic losses.
Answer: When the stock falls to a pre-set price, limiting losses. Stop-losses automatically sell if the price drops to your set level — enforcing discipline and capping downside.
Answer: The optimal bet/position size for a given edge. Kelly Criterion calculates the ideal position size based on your edge and odds — maximising long-run growth.
Answer: The largest peak-to-trough loss over a period. Max drawdown is the worst loss from any portfolio peak to subsequent trough — a key risk metric.
Practice this with $10,000 in virtual cash in Tradecraft, free paper trading with real market data.
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