12.1What is risk management?
1What is it?
Risk management is planning in advance how much you can lose on each trade, each stock and your whole portfolio, and sticking to it.
2Why does it exist?
Losses are certain in markets. Without limits, one bad trade or one bad year can destroy years of savings.
3Real-life example
Wearing a helmet doesn’t stop accidents; it stops an accident from being fatal.
4Diagram
Risk management
Per trade
- • Stop-loss
- • Position size
Per portfolio
- • Diversification
- • Asset allocation
Personal
- • Emergency fund
- • No borrowed money
- • Emotional control
5Quick revision
- Decide maximum loss before entering.
- Limit per trade, per stock, per portfolio.
- Survival first.
6Knowledge check
Q1. Main goal of risk management?Show answer
Keep losses small so you can stay invested and recover.
Q2. Name two tools.Show answer
Stop-loss, position sizing, diversification, asset allocation.
Q3. When should you decide your max loss?Show answer
Before entering the trade.