Risk management is what keeps a strategy alive long enough to find out if it's any good. Drawdown is the drop from a peak to a trough, and position sizing decides how much to put on each bet. Both exist for one reason: so one bad streak can't end the game.
About 2 min of reading
Before this new lesson, one small question about the lesson you just finished. Recall it, do not look it up.
A strategy is only as good as its worst moment, so I measure the biggest drop from a peak to a trough and size each trade to a small fixed fraction of the account, proving one bad streak cannot end the game.
I walk an equity curve tracking the running peak, then print the largest peak-to-trough drop as a percentage so the real downside is visible before any returns are celebrated.
Before you run it, say out loud what it will print. Then open the answer.
I risk a fixed small fraction of the account and size the position so that losing the stop makes the trade affordable rather than catastrophic.
Before you run it, say out loud what it will print. Then open the answer.
Before you write anything, put these lines back in the right order. Click a line to move it up one step. This support step is easier than writing code from scratch, and it is here to make the last example stick.
Read the first example one line at a time. A line that prints shows what appears on screen; the rest set things up quietly.
Risk a small, fixed fraction of the account per trade. One percent makes a losing streak survivable; twenty percent can end it on Tuesday. Sizing is the single most important decision a trader makes, and it's almost never the exciting part.
Spread money across strategies that move independently, so one loss is cushioned by another win. If it seems calm and diversified but everything still falls together, the calm is an illusion.
Account peak: $100,000
Then it fell to $70,000
Drawdown = 30%A 30% drop is survivable. A 50% drop means you need to double the rest of your account just to get back to zero. Drawdown isn't theoretical, it's the number that decides whether you get another chance at all. Chasing returns is the fun part; keeping drawdown small is the part that lets you keep playing.
risk_per_trade = account * 0.01
shares = risk_per_trade / (entry - stop)Risking 1% of the account per trade means a long losing streak just gets you smaller, not wiped out. Size it that way and a bad month is uncomfortable. Risk 20% and a bad month is the end of the story.
Holding 5 tech stocks
Feels like diversification
Actually one betIf every position falls together, you haven't diversified, you've made five versions of the same bet. Real spread means the positions move independently, so when one drops the others don't all fall at once. Most people diversify the name but not the risk.
Each one is defined here on this site. Open the entry for the full definition and the other words it points at.