Defining Your Risk Tolerance And Capital Allocation
A 1-minute lesson from the MarketPro academy, one of 14 in building a trading plan.
Before setting specific position sizes or rules, a trading plan needs a clear-eyed assessment of how much capital is genuinely available to trade, and how much loss can be tolerated — both financially and psychologically — without disrupting other parts of life. Trading capital should generally be money that isn't needed for near-term essential expenses, since capital under that kind of pressure tends to produce fear-driven decisions.
Before setting specific position sizes or rules, a trading plan needs a clear-eyed assessment of how much capital is genuinely available to trade, and how much loss can be tolerated — both financially and psychologically — without disrupting other parts of life.
Trading capital should generally be money that isn't needed for near-term essential expenses, since capital under that kind of pressure tends to produce fear-driven decisions. Separately, risk tolerance describes how large a drawdown a trader can experience without abandoning their plan or making emotionally driven changes — this is often lower than people initially assume.
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Lesson 12 of 14 in Building a trading plan
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