00:00Managing risk in the stock market means controlling how much capital you can lose on any single trade or event,
00:06not predicting winners, and it's done primarily through position sizing, stop losses, and diversification rather than picking better stocks.
00:14The most cited rule is the 1-2% rule. Never risk more than 1-2% of total portfolio
00:21capital on a single trade, meaning a $10,000 account should risk $100-200 per position, sized by dividing that
00:29amount by the distance to your stop loss.
00:31Beyond that baseline, risk management breaks into distinct techniques.
00:351. Stop-loss orders. Either fixed percentage, e.g. exit at minus 8%, a threshold popularized by O'Neill's conslim
00:44method, or volatility-based using ATR, average true range, multiples, which adapt to how much a stock normally moves.
00:522. Diversification across uncorrelated sectors. Holding 15-30 stocks reduces unsystematic risk substantially versus 5, though beyond 30 the benefit
01:02flattens while tracking becomes harder.
01:053. Position sizing models like the Kelly Criterion, which calculates optimal bet size from win rate and payoff ratio, though
01:13most practitioners use a fraction, e.g. half Kelly, since full Kelly is aggressive.
01:184. Hedging via options, protective puts, or inverse ETFs, useful for larger portfolios but carrying its own cost drag.
01:27Context matters heavily. A day trader may cap daily loss at 3% of capital and stop trading if hit.
01:35While a long-term investor tolerates deeper drawdowns, historically the S&P 500 has seen 30-50% plus corrections
01:42roughly once per decade because the time horizon allows recovery.
01:47Risk tolerance also shifts with account size, leverage use, and market volatility regime.
01:52VIX above 30 generally warrants smaller position sizes.
01:56I can't verify any platform-specific risk tool's current performance, so evaluate those independently.
02:03Practically, define your max loss per trade and per day before entering any position, size positions by stop-loss distance
02:11rather than gut feeling, and diversify enough to survive a single bad pick without material portfolio damage.
02:17Finally, remember that everything we discussed today is for educational purposes only and does not constitute financial advice.
02:25Good luck to everyone, and see you in the next video.
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