What is Risk Management?
Risk management in trading and investing refers to identifying, analyzing, and mitigating potential losses. It’s about protecting your capital and making decisions that allow you to stay in the game long enough to let your edge work in your favor.
Why is it Important?
- Capital Preservation: Losses hurt more than gains help due to the mathematical disadvantage of drawdowns. For example: A 50% loss requires a 100% gain to break even.
- Rule: Never let a loss exceed 7-10% of the purchase price.
- Why: Small losses are easier to recover from and keep emotions in check.
- Rule: Risk no more than 1-2% of your total capital on any single trade.
- Why: Proper position sizing ensures that even a string of losses won’t significantly impact your portfolio.
- Rule: Only take trades with a favorable reward-to-risk ratio (3:1 or higher).
- Why: This ensures that your winners outweigh your losers over time.
- Rule: Be selective and wait for the right conditions.
- Why: Over-trading increases transaction costs and exposes you to unnecessary risks.
- Rule: Adjust risk based on market conditions.
- Why: In volatile markets, tighten your stops and reduce position sizes. In trending markets, give your trades more room to breathe.
- Decide the maximum amount of capital you’re willing to risk on any single trade (e.g., 1% of portfolio).
- Use technical levels such as support, resistance, or moving averages to set your stop-loss.
- Position Size = (Risk per Trade) ÷ (Risk per Share)
- Example: If your risk per trade is $1,000 and risk per share is $5, you can buy 200 shares.
- Regularly review your portfolio to ensure you’re adhering to your risk parameters.
- Entry Point: $100
- Stop-Loss: $95
- Target Price: $115
Mark Minervini’s Principles of Risk Management
Minervini’s trading success hinges on rigorous risk management. Here’s a breakdown of his principles:
1. Cut Losses Quickly
| Loss % | Gain % Required to Break Even |
| 5% | 5.3% |
| 10% | 11.1% |
| 20% | 25% |
| 50% | 100% |
2. Position Sizing
| Portfolio Size | % Risk per Trade | $ Risk per Trade | Stop-Loss Distance (%) | Position Size |
| $100,000 | 1% | $1,000 | 5% | $20,000 |
| $100,000 | 2% | $1,000 | 5% | $40,000 |
3. Focus on High-Probability Setups
| Scenario | Risk (per trade) | Potential Reward | Reward-to-Risk Ratio | Decision |
| Trade A | $1,000 | $3,000 | 3:1 | Accept |
| Trade B | $1,000 | $1,500 | 1.5:1 | Reject |
4. Avoid Over-Trading
5. Market Environment Awareness
Practical Framework for Risk Management
Step 1: Define Your Risk per Trade
Step 2: Set Stop-Loss Levels
Example: If you buy a stock at $100 with a stop-loss at $95, your risk per share is $5.
Step 3: Calculate Position Size
Step 4: Monitor and Adjust
Visual Aid: Risk Management in Action
Imagine the following chart of a hypothetical stock:
In this setup, the risk per share is $5, and the reward per share is $15, giving a reward-to-risk ratio of 3:1.
Visualize this as a simple candlestick chart with annotated entry, stop-loss, and target levels.
Final Thoughts: Mastering Risk Management
Mark Minervini’s approach to risk management is not just about avoiding losses—it’s about building a disciplined framework that minimizes emotional decision-making and maximizes long-term success. The key takeaway is to treat risk management as a core skill, not an afterthought.
To quote Minervini: “The best traders aren’t afraid to take risks; they are afraid of taking the wrong risks.”
Start small, stay disciplined, and always remember: Your first job as an investor is to survive. Your second job is to thrive. Thanks for reading The Art of Risk Management: Lessons from Mark Minervini
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