Encyclopedia Classification
Category: Trading Systems • Capital Preservation • Professional Execution
Discipline: Risk Management • Position Sizing • Portfolio Construction
Prerequisites
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Article 209 — Derivatives Markets: Futures, Perpetual Contracts, Funding Rates, Open Interest, Liquidations, and Leverage
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Article 204 — Liquidity Analysis: Stop Hunts, Liquidity Pools, Market Manipulation, and Institutional Price Engineering
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Article 195 — Price Action Trading: Candlesticks, Market Intent, and Reading the Story Behind Every Move
Related Articles
Trading Psychology • Portfolio Management • Probability Theory • System Development • Algorithmic Trading
Definition
Risk management is the process of protecting trading capital by controlling:
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How much money is placed at risk.
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How large positions are.
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When losses are accepted.
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How exposure is distributed.
The purpose of risk management is not avoiding losses.
Losses are unavoidable.
The purpose is:
To ensure losses are small enough that winning trades can overcome them and the trader survives long enough for their edge to work.
Beginner Explanation
Most new traders focus on:
"When will I make money?"
Professional traders focus on:
"How do I avoid losing everything?"
A trader with:
90% winning trades
can still fail.
A trader with:
40% winning trades
can become profitable.
The difference:
Risk management.
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