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Risk & Psychology

Sizing, stops, drawdowns and the habits that decide outcomes.

• AnchoringFixating on a particular price, such as what you paid, and judging everything against it.
• Bag holderAn investor stuck holding a stock that has fallen far below what they paid.
• Black swanA rare, extreme event that few expected and that has outsized effects.
• Confirmation biasFavoring information that supports what you already believe.
• CorrelationA measure of how closely two assets move together, from -1 to +1.
• Diamond handsSlang for holding a position through big swings with conviction.
• DrawdownThe decline from a portfolio's or stock's peak to its subsequent low.
• ExpectancyThe average amount a strategy earns or loses per trade, over many trades.
• FOMO (fear of missing out)The urge to jump into a trade because it has already moved a lot.
• FUDFear, uncertainty and doubt: negative news or talk that spreads worry about an asset.
• HedgeA position taken to offset the risk of another.
• Herd behaviorFollowing the crowd instead of your own analysis.
• Kelly criterionA formula for the bet size that maximizes long-run growth, given your edge and odds.
• Loss aversionThe tendency to feel losses more strongly than equal gains.
• OvertradingTrading too often or in too large a size.
• Paper handsSlang for selling quickly out of fear when a position moves against you.
• Position sizingDeciding how much money to put into a single trade.
• Profit factorGross profits divided by gross losses over a set of trades.
• Revenge tradingTrading to win back a loss immediately, often with bigger size and weaker setups.
• Risk/reward ratioThe amount you stand to gain compared with the amount you risk.
• Sharpe ratioReturn above the risk-free rate, divided by volatility.
• Stop lossA pre-set exit point that limits how much you lose on a position.
• Sunk-cost fallacyLetting money already lost influence what you do next.
• Trade journalingRecording your trades and the reasons behind them so you can review your process.
• Trading planA written set of rules for what you trade, when you enter and exit and how much you risk.
• Win rateThe percentage of trades that end in a profit.

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