Stock Market Glossary
Risk management
System of rules to limit losses.
In brief: System of rules to limit losses.
Meaning in practice
Risk management includes position sizing, stop loss, diversification, correlation analysis and psychological discipline. Professionals often lose less not because they are right more often, but because they consistently keep losses small.
Context for investors and traders
The term describes a common behavioural bias that can become especially visible during sharp market moves. It is not a judgement on individual investors, but a prompt to make decisions understandable and repeatable.
How to use this in practice
A simple decision process is an effective countermeasure: note the trigger, set objective and risk, then act. It makes clear whether a decision rests on testable information or on FOMO, fear or the urge to recover a loss quickly.
What to keep in mind
Review decisions at calm intervals instead of after every market move. Changing rules retrospectively removes the benchmark; following them rigidly should still leave room for genuinely relevant new information.
