Risk, Position Sizing and Trade Management

Account Risk

Account risk describes how much of a trader's account is exposed to potential loss from one trade, several trades or the portfolio as a whole.

Basis Risk

Basis risk is the risk that the instrument used to hedge an exposure does not move closely enough with the exposure being hedged.

Break Even Price

Break even price is the price at which a position produces neither a net profit nor a net loss under the calculation being used. Depending on conte...

Break Even Stop

A break even stop is a stop loss moved toward the trade's entry or economic break even area after the position has moved favorably.

Correlation

Correlation describes the degree to which two assets, markets or variables tend to move in relation to one another over a measured period. Positive...

Drawdown

Drawdown measures a decline in account or portfolio value from a previous peak. It is commonly expressed as a percentage.

Equity Curve

An equity curve is a visual representation of how a trading account's value changes over time.

Expectancy

Trading expectancy is the average amount a trading approach is expected to gain or lose per trade based on its historical or assumed win rate and t...

Hedge

A hedge is a position or strategy designed to reduce exposure to a particular market risk.

Hedging

Hedging is the process of using another position or financial instrument to reduce exposure to a particular risk.

Loss Streak

A loss streak is a sequence of consecutive losing trades.

Maximum Account Risk

Maximum account risk is a predefined limit on the amount of trading capital a trader is willing to expose to potential loss across open positions.

Maximum Drawdown

Maximum drawdown is the largest observed decline from a peak to a subsequent trough over the period being measured.

Partial Close

A partial close reduces only part of an existing position while leaving the remaining exposure open.

Portfolio Risk

Portfolio risk is the combined risk created by all positions held within a trading portfolio. It considers more than the risk of each trade individ...

Position Size Formula

A position size formula calculates an appropriate position size from the amount a trader intends to risk and the distance between entry and stop. A...

Position Sizing

Position sizing is the process of determining how large a trading position should be based on factors such as account size, intended risk and the d...

R Multiple

An R multiple expresses the result of a trade relative to the amount initially defined as risk. If the planned risk is $100: A $100 loss = −1R A $2...

Risk Budget

A risk budget is the amount of risk a trader allocates across individual trades, strategies or areas of a portfolio.

Risk Management

Risk management is the process of controlling how much capital is exposed to potential loss and deciding in advance how trading risk will be handle...

Risk of Ruin

Risk of ruin describes the possibility that trading losses reduce capital so severely that a trader can no longer continue the strategy effectively...

Risk Per Trade

Risk per trade is the amount or percentage of trading capital a trader intends to lose if a trade reaches its predefined invalidation or stop level.

Risk Reward Ratio

Risk reward ratio compares the amount a trader plans to risk with the potential reward if a trade reaches its intended target. For example, risking...

Scaling In

Scaling in means building a position through multiple entries rather than entering the entire intended position at once.

Scaling Out

Scaling out means reducing a position gradually through multiple exits rather than closing the entire position at once.

Stop Distance

Stop distance is the difference between a trade's entry price and its planned stop loss level. It may be measured in price, percentage or another u...

Trade Invalidation

Trade invalidation is the market condition or price level that causes the original reasoning behind a trade to no longer hold.

Trade Management

Trade management is the process of managing a position after entry according to a predefined plan. It can include adjusting stops, taking partial p...

Trading Journal

A trading journal is a structured record of trades, decisions, results and observations used to evaluate trading performance over time.

Trading Plan

A trading plan is a predefined framework describing how a trader identifies opportunities, enters positions, manages risk and exits trades.

Volatility

Volatility describes the magnitude and variability of price movements over a period. Higher volatility means price is moving more widely or rapidly...

Win Rate

Win rate is the percentage of completed trades that produce a profit under the measurement being used.