Session 16 • Risk Management Lab (No Math)
Keep losses small. Stay in the game. Everything here is plain English—no formulas.
0) Why manage risk?
Goal: Survive the bad days so the good days count.
- Decide before entry: where you’ll exit if wrong, how big you’ll go, and what news you’ll avoid.
- Use the same small slice of your account per idea (Tiny/Small/Standard).
- Write a one-line plan. Feelings change; plans don’t.
Analogy: Seatbelt + speed limit. You still drive, just safer.
1) Stop-loss basics
Place your stop just below a level that would prove your idea wrong (e.g., under recent support). If price breaks there, exit and reassess.
Don’t:
- Move the stop farther away after entry “to give it room.”
- Add to a loser just because it’s cheaper.
- Hold through major news if you don’t understand the risk.
2) Position sizing (no math)
Rule of thumb: If a stopped-out trade feels scary, you’re too big.
Think this way: A normal loss should be an annoyance, not a story.
3) Cash vs margin
Cash only: You pay with your own money. No forced selling. Your stop controls the loss.
Margin caution:
- Borrowing adds power and danger.
- Fast drops can trigger forced sells (“margin calls”).
- New traders: master stops and size first. Margin later (if ever).
4) Scenario rehearsal
Small dip: If your stop is outside normal noise, do nothing. If it hits the stop, exit calmly. No revenge trades.
Why rehearse? You make the hard choices now, not in the heat of the moment.
5) What is VaR? (plain English)
Value at Risk (VaR) is a bad-day yardstick: “On a typical bad day, how rough could it get?”
In calm markets, the “bad-day” bar is smaller. In wild markets, expect bigger swings—size down.
ETL (tail loss): “What are the really bad days like?” Respect outliers.
6) Order types 101 (when to use what)
Market: Fills now at best available price. Good in liquid, large names. Watch for slippage in thin stocks.
Tip: Use limit to control entry price; use a stop (sell) to get out when wrong. Stop-Limit can miss on gaps.
Video — Understanding Market, Limit, and Stop Orders
Short walkthrough of market, limit, and stop orders; then practice with the Order Types section above.
Green Streak — Candles 101
How to Read Candlestick Charts (with ZERO experience)
Green = close > open (up day); Red = close < open (down day). Wicks show intraday high/low.
Candlestick Charts — Beginner’s Guide
Walkthrough of opens, closes, bodies vs wicks, plus how candles roll up into trends.
7) Scaling in & out
All-in: Simple, but if timing is off, it hurts more. Beginners often prefer small scale-ins.
Simple rule: Small entries, clear stop, partial take-profits into obvious resistance.
8) Diversification & correlation (plain English)
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Idea: If several stocks move together, you’re not diversified. An ETF can smooth single-name drama.
Video — Index Funds vs Mutual Funds vs Hedge Funds vs ETFs (Cap-Size Risk)
Use this to connect fund wrapper types with large-cap vs small-cap risk. Watch, then scan the quick cheat-sheet below.
Cap-size risk (no math):
- Large-cap funds: steadier earnings & liquidity → lower typical volatility, usually smaller drawdowns.
- Small-cap funds: faster growth potential but more cyclical & jumpy; can move a lot on liquidity/news.
- Mid-cap: in-between: growth runway + better liquidity than smalls.
Wrappers (how you own the basket):
- ETF: trades all day, usually low fees, tax-efficient. Mind bid-ask spread.
- Index mutual fund: tracks an index; priced once at NAV (end of day).
- Active mutual fund: manager picks stocks; higher fees; performance varies.
- Hedge fund: private/illiquid, leverage/shorts, accredited investors only — not typical for students.
How to pick (quick sanity checks):
- Match the cap-size to your risk tolerance & time horizon.
- Check expense ratio & liquidity (for ETFs: average volume & spread).
- Know the index (S&P 500 large-cap vs Russell 2000 small-cap, etc.).
- Avoid duplicating exposure across multiple funds unintentionally.
9) Liquidity & trading halts
Large-cap: Usually tight spreads, easy fills. Still respect news risk.
Risks:
- Thin names = big spreads, surprise gaps.
- After-hours = lower liquidity; stops may not trigger.
- Halt = you cannot exit. Keep sizes small around events.
10) Daily risk budget (stop-trading rules)
Rule: If I hit my daily stop (e.g., 2 losers), I stop and cool off.
Why: Strings of losses happen. A daily brake prevents tilt and oversizing.
11) Emotions & routines
Green streak: Cut size in half next trade. Protect the lead.
Routine: Pre-market plan → set alerts → place stops → post-market review. Same steps every day.
12) Journaling (copy & use)
Why journal? You forget the details fast. The journal shows your real habits and what to fix.
13) Update your plan (cadence)
Monthly: Review winners/losers, rules followed/ignored, and one change to test.
Red flags:
- Moving stops wider after entry
- Adding to losers
- Trading when tired/distracted
- No written plan
14) Survival checklist
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Truth: You’ll be wrong often. The edge is losing small and letting winners breathe.
15) Homework — One-page plan
Template (copy & fill)
- Risk per trade: Tiny / Small / Standard (circle)
- Stop style: Below support / Time / Trailing / News
- Account: Cash (recommended) / Margin (why?)
- Daily stop: 1 / 2 / 3 losers; Cool-off: 20 min / Rest of day
- Scenario rules: dip → __ ; gap → __ ; earnings → __
- Order type defaults: Entry __ / Exit __ / Stop __
Submit: 1 page + 3 bullet “lessons learned.” Plain English.
Ready to check your understanding?
15 quick questions • no math • a few minutes.