Risk management
A strategy is a way of expressing a view. Risk management is what decides whether you survive being wrong about it long enough for the view to matter. This section covers sizing, ruin, drawdown, allocation and the mechanics of managing a position once it is open.
Why risk management comes before strategy selection. Every strategy on this site has a maximum loss, whether defined by its structure or by how far the market can move. Risk management is the set of decisions — size, allocation, exit — that determines what that maximum loss does to your capital. SEBI's own studies have found that a large majority of individual F&O traders in India lose money; sizing and exits are where most of that damage is done.
Position Sizing
Position sizing is the rule that fixes how many lots to trade so that a losing trade costs a pre-chosen fraction of the account. It converts a risk budget…
Risk of Ruin
Risk of ruin is the probability that cumulative losses reduce capital below a threshold at which the account can no longer continue, before any long-run e…
Maximum Drawdown
Maximum drawdown is the largest peak-to-trough decline in account equity over a period, expressed as a percentage of the peak. Its defining feature is rec…
Capital Allocation
Capital allocation is the division of a finite account across strategies, instruments and time horizons. The institutional standard is to allocate by risk…
Diversification
Diversification is the reduction of portfolio variance achieved by combining imperfectly correlated positions. It reduces idiosyncratic risk — the part sp…
Trade Management
Trade management is the set of decisions taken after a position is opened and before it is closed. It concerns mark-to-market versus realised profit and l…
Rolling Positions
Rolling is closing an existing option leg and simultaneously opening a further-dated or different-strike leg as a single transaction. Rolling a losing pos…
Adjustments
Adjustments are changes made to a multi-leg option position when the market tests it — adding a leg, converting a strangle to an iron condor, or rolling t…
Exit Planning
Exit planning is defining a trade's exits — profit target, time limit, and loss response — before entry. Pre-committing matters because a stop on an optio…