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RISK MANAGEMENT
There is more to a strategy than its return.
A profitable strategy can still suffer losses large enough to make it difficult to trade. Look at the size of wins and losses, the sequences they arrive in, and how much capital each position puts at risk.
Expectancy measures the average profit or loss per trade. Drawdown measures a decline from an earlier account high. Position size determines how much a price move affects the account. Risk of ruin estimates the chance of reaching a defined failure threshold under stated assumptions.
Position Sizing Explained — Risk per Trade, Stop Distance, and Exposure
Position sizing converts a predefined risk budget and stop distance into exposure size. This guide explains the basic formula, instrument-value adjustments, leverage, and why…
Each metric answers a different question
| Metric | What it tells you | What it does not establish |
|---|---|---|
| Expectancy | Average profit or loss per trade | Whether it will persist or whether the losses along the way are tolerable |
| Maximum drawdown (MDD) | The largest peak-to-trough decline in the sample | The worst loss that could occur in the future |
| Position size | The amount of capital committed to a trade | A guaranteed limit on the realized loss |
| Risk of ruin | The probability of reaching a specified failure threshold | Whether that probability holds under different conditions or assumptions |
For education and research. Historical metrics and backtests do not guarantee future returns.