Risk management
Position size, stop-loss, drawdown, psychology and prop trading.
30 terms · 5 guides
Guides
How to set a stop-loss: using structure and ATR
A stop-loss goes where your trade idea stops working, not where the loss feels bearable. Here are two practical ways to find…
Read →Risk per trade: how to size a positionA simple formula that answers "how much should I buy".
Read →Prop firm challenge: how it works and how to passA prop firm promises you a large account if you pass a paid evaluation. Here is what the rules are made of, why most people fail…
Read →Pre-trade checklistTen questions to answer before you enter.
Read →Trader formulasFive formulas you use every day.
Read →For beginners
Averaging downAveraging down is buying more of an asset that has fallen since you bought it, to lower your average entry price. It enlarges a position…BeginnerBreakevenBreakeven is the price at which a trade closes at zero after fees. 'Moving to breakeven' means shifting your stop-loss to the entry price…BeginnerDaily loss limitA daily loss limit is the maximum amount or percentage of your account you are willing to lose in one day. Once you hit it, you stop…BeginnerDiversificationDiversification is spreading money across different assets so one failure does not sink the whole portfolio. It lowers risk but does not…BeginnerDollar-cost averaging (DCA)Dollar-cost averaging (DCA) is buying an asset with the same amount of money at regular intervals, whatever the price. It smooths out a…BeginnerDrawdownA drawdown is the decline of an account or asset from a peak to the following low, in percent. After a 50% drawdown you need a 100% gain…BeginnerFOMOFOMO (fear of missing out) is the fear of missing a profit. It pushes you to buy after a big rally with no plan and no stop. Written entry…BeginnerOvertradingOvertrading is trading too often: taking trades without a real setup, out of boredom, excitement or a need to 'be in the market'. It…BeginnerPosition sizePosition size is the trade size at which hitting your stop-loss costs a pre-chosen amount. Formula: money at risk / distance to the stop.BeginnerProp challengeA prop challenge is a paid evaluation from a prop firm: hit a profit target without breaking the loss limits. Pass it and you get a funded…BeginnerProp firmA prop firm is a company that lets traders trade its capital and shares the profits with them. Access is usually granted after passing a…BeginnerRevenge tradingRevenge trading is taking impulsive trades right after a loss to win the money back fast. They are usually bigger and unplanned, so the…BeginnerRisk per tradeRisk per trade is the amount you lose if your stop-loss is hit, usually as a percentage of your account. A common rule for beginners is no…BeginnerRisk/Reward (R:R)Risk/Reward (R:R) is the ratio of a trade's risk to its potential profit. At 1:2 the target is twice as far as the stop. Break-even win…BeginnerStop-lossA stop-loss is an order that closes your position when price reaches the level where your trade idea is invalidated. It limits the loss in…BeginnerTake profitA take profit is an order that automatically closes a trade in profit when price reaches a level you set in advance.BeginnerTrade journalA trade journal is a sheet or notes where you record every trade (entry, exit, stop, size, reason and result) so you can see which…BeginnerTrading planA trading plan is a written set of rules: what, when and how you trade, how much you risk and what you do after losses. It replaces…BeginnerTrading psychologyTrading psychology is how emotions and thinking habits shape trading decisions: fear, greed, excitement and the urge to win losses back.…BeginnerWin rateWin rate is the share of your trades that close in profit. If 6 out of 10 trades are winners, your win rate is 60%. On its own it does not…Beginner
Advanced
BacktestingBacktesting is testing a trading strategy on historical data to see how it would have performed under fixed rules. It gives you…AdvancedConfirmation biasConfirmation bias is the tendency to notice and value information that supports what you already believe and to ignore what contradicts…AdvancedExpectancyExpectancy is the average result per trade over many trades, combining win rate with the size of wins and losses. Positive expectancy is…AdvancedHedgeA hedge is a protective position against an open trade. You keep the main position and open a second one in the opposite direction, so a…AdvancedKelly criterionThe Kelly criterion is a formula for the share of capital to risk on a trade to maximise long-run growth. In practice traders use a…AdvancedLoss aversionLoss aversion is the tendency to feel a loss roughly twice as strongly as a gain of the same size. It makes traders hold losers and take…AdvancedProfit factorProfit factor is total gross profit divided by total gross loss over a period. Above 1 the strategy made money; below 1 it lost money.AdvancedRisk of ruinRisk of ruin is the probability of losing your whole account, or a set share of it, given your strategy and risk size. It rises sharply…AdvancedScaling in and outScaling in and out means opening or closing a position in parts at different prices instead of all at once. Traders use it to manage risk…AdvancedSharpe ratioThe Sharpe ratio is a risk-adjusted return measure: how much a return beats the risk-free rate per unit of volatility. Higher is better.Advanced