How to assess the risk of a position, step by step
intermediate
Automated material · TradeAlmanac editorial deskPrepared by a language model from our stored data and checked by an editor.
Содержание · 5
Step 1. How much are you prepared to lose
Not "how much do you want to earn". Position size is determined by the acceptable loss rather than the desired profit — because you do not control the second and you fully control the first.
Step 2. What could go wrong at this company
Leverage, dependence on a single contract, regulatory risk.
1,67
Step 3. How liquid the security is
Whether you will be able to exit if you want to. A narrow Spread and regular trades — yes. An empty order book — no, and the price you see means nothing.
Step 4. How it will behave alongside the rest of the portfolio
A security correlated with everything you already hold adds no diversification — it adds concentration.
Step 5. What drawdown you could withstand
Look at the security's historical Drawdown and answer honestly whether you would have sold at the bottom. If yes, the position is too large.
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Prepared by a language model from our stored data and checked by an editor.
How we use language modelsSimilar articles
- Hidden concentration: when twenty securities are one betA portfolio can look varied and depend on a single factor. That is established by calculation rather than by looking.
- Portfolio liquidity risk: how long an exit would takeWhat has to be assessed is not only a position's return but the time it takes to close without losses.
- Correlation: why diversification sometimes stops workingThe link between assets is not constant and rises precisely in a crisis — that is, when it was being counted on.
- Beta: how closely a security repeats the marketA coefficient of sensitivity to the market. Useful for understanding the structure of risk and useless as a forecast.