Again slightly different to my usual style of posts but just wanted to send out some brief thoughts on Risk Management.
Risk to me is not volatility, rather it is the amount of money one stands to lose on a position/trade if it goes against them. Therefore, before taking any position risk should be pre-identified. Techniques one can employ to manage risk are via managing position size and use of stops losses.
Example of trades where 1% of portfolio is at risk:
If you take a 10% position and your stop loss is 10% then you are risking 1% of your portfolio when it gets hit.
Likewise if you allocate 1% to a call option and it expires worthless, you also risked and lost 1%. Further, obviously if a stock has wide trading range, then do not want to set stop too tight. I don’t use margin or options which helps to manage risk.
Furthermore, avoiding leverage can make managing risk easier. As a general rule risking 1% of port may be considered quite high and some traders cap max at 0.5% of port per trade.
Thank you for reading and see you for the next one!