Risk vs Reward

Risk is Defined by YOU, Not Your Stop Loss

Here's what most beginners get wrong: your stop loss doesn't define your risk - YOU define your risk.

Before any trade, you decide: "I'm willing to risk X% of my capital." That's your risk - it's fixed. Your stop loss then determines your position size, not your risk.

Example - €10,000 capital, 1% risk (€100):

• Tight stop loss (5% away): You can buy €2,000 worth → if it drops 5%, you lose €100
• Wide stop loss (10% away): You can only buy €1,000 worth → if it drops 10%, you lose €100

Same risk (€100). Different position sizes. The stop loss changed how much you bought, not how much you risked.

The Trade-off: Probability vs Reward

Here's where it gets interesting:

There's no free lunch - you're always trading probability for reward.

Risk-to-Reward Ratio

The risk-to-reward ratio tells you how much you can gain relative to what you're risking.

Example - Risk-to-Reward of 3:1:

If your risk per trade is 1% of your capital:

• You risk 1%
• If you win, you gain 3% of your total capital

If your risk per trade is 2% of your capital:

• You risk 2%
• If you win, you gain 6% of your total capital

This is why risk-to-reward matters - a 3:1 ratio means you only need to win 1 out of 4 trades to break even.

What About Long-Term Investments?

Even if you don't use a stop loss, you still have risk.

For a long-term investment, assume the worst case: you could lose it all.

So if you invest €1,000 in a single stock without a stop loss, your risk is €1,000. That's 10% of a €10,000 portfolio - probably too much on one position.

This is why diversification matters for long-term investors.

Rules to Follow

1. Decide Your Risk For Each Trade

Before anything else: "I risk X% per trade"

2. Calculate Position Size Based on Stop Loss

3. Accept the Trade-off

It's a spectrum - the tighter your stop, the more you lean toward higher reward potential but lower probability. The wider your stop, the more you lean toward higher probability but lower reward potential. There's no perfect answer - find the balance that fits your strategy and the specific trade setup.

4. Never Move Your Stop Loss Further Away

If the trade goes against you, accept it. Moving your stop further away means you're increasing your risk after you've already entered the trade - that's how small losses become big losses.

Key Takeaways

• Risk is what YOU decide to lose, not where your stop loss is
• Stop loss determines position size, not risk
• Tighter stops = more reward potential but lower probability of winning
• For investments without stops, assume you could lose it all - size accordingly

Not financial advice. Always do your own research.

Last updated: January 2026