Common Risk Management Mistakes
Most blow-ups aren't strategy failures — they're risk management failures. These are the mistakes that consistently end trading careers.
1. Position size by 'how confident'
Doubling size on 'sure thing' trades. Statistical baseline: confidence and outcomes are barely correlated. Fix: same position size formula every trade.
2. No max daily loss
Trading through losses, sizing up to recover. Catastrophic. Fix: hard stop at 2-3% daily loss. Walk away.
3. Correlated overexposure
5 tech stocks = 1 position in tech. Single sector move can crater account. Fix: cap sector exposure at 20-25%.
4. Margin debt creep
Slowly using more margin over time. Position size grows faster than account. Fix: max margin usage rules. Reduce systematically after losses.
5. Adding to losers
Doubling down on losing positions. Doubles down on bad thesis. Fix: never add to losers. Only add to winners after they prove themselves.
6. Trading without journal
No data on what's actually working. Improvement is random. Fix: log every trade. Review weekly.
7. Ignoring portfolio heat
Total open risk across all positions = 15% of account. Sector move = catastrophic loss. Fix: cap total open risk at 4-6% across all positions.
8. No risk-of-ruin awareness
Sizing at 5% per trade with 50% win rate = high probability of full account loss over enough trades. Fix: calculate risk of ruin. Size to keep it under 1%.
9. Insurance neglect
No portfolio hedges in obvious bubble regimes. Fix: tail-risk hedging (puts on index, VIX exposure) is cheap when you don't need it, priceless when you do.
10. Confusing trading capital with savings
Same dollars meant for retirement also used for active trading. Loss aversion + emotional decisions. Fix: separate accounts. Trading capital = capital you can afford to lose.