What are the names of the three kinds of risks that are involved when position sizing?
One of them answers the question of how much of my entire portfolio will I lose if I’m stopped out of my trade. This is usually figured out by taking your total account balance and multiplying it by a predetermined percentage.
A second one is the same risk we all think of when talking about the risk to reward ratio. I usually just call this the anticipated risk.
The third one is the risk of suffering a catastrophic loss when something goes horribly bad—like a company you’re invested in files bankruptcy. I usually call this the actual risk.
Edited by fast - 5/6/12 at 8:05pm