Volatility and Position Risk

⚡In 30 seconds

•Learn how stock volatility impacts position-level and portfolio-level risk.
•Category: risk
•Uses 1 tool(s) for analysis

Learn how stock volatility impacts position-level and portfolio-level risk.

Understanding Risk in Trading

Risk management is about defining downside scenarios before entering positions. It includes stop-loss planning, position sizing, and understanding portfolio-level impact.

Effective risk management helps you survive drawdowns, maintain capital, and stay disciplined during volatile periods.

Risk-Reward Framework

Before entering any trade, define your maximum acceptable loss (risk) and minimum profit target (reward).

A 1:2 risk-reward ratio means risking $500 to potentially gain $1,000. Professional traders often seek 1:3 or better ratios.

Example: Setting Stop-Loss Levels

You buy a stock at $50 with a target of $65 (30% gain expected).

1.Set risk tolerance: You are willing to risk 10% = $5 per share
2.Stop-loss price: $50 - $5 = $45
3.Risk-reward ratio: Risk $5 to gain $15 = 1:3 ratio
4.Position size: If willing to risk $500 total, buy 100 shares

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Key Concepts

Maximum Drawdown

The largest peak-to-trough decline in your portfolio. Understanding this helps you set realistic stop-losses and manage emotional reactions.

Risk Per Trade

Limit risk to 1-2% of total portfolio per trade. This ensures no single loss can significantly damage your account.

Correlation Risk

Multiple correlated positions can amplify losses. Diversify across uncorrelated assets to reduce this risk.

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