Risk Management Basics

Risk management is the most important skill for any investor. Markets are inherently uncertain — even the best analysis can be wrong. The goal isn't to avoid all losses, but to ensure that losses remain small and manageable while gains have room to grow.

Stop-loss orders are your first line of defense. A stop-loss is a predetermined price at which you'll sell to limit your loss. A common approach is setting a stop-loss 7-10% below your purchase price. This means if a stock drops from 100 to 90-93, you exit before the loss gets worse.

The risk-reward ratio compares potential loss to potential gain. Before entering any trade, ask: "If my stop-loss is 10% below, is my target at least 20% above?" A minimum 1:2 risk-reward ratio means you can be wrong half the time and still be profitable.

Position sizing ties your stop-loss to your total portfolio risk. The "2% rule" means never risking more than 2% of your total portfolio on a single trade. If your portfolio is 100,000 EGP and your stop-loss is 10% away, your maximum position size is 20,000 EGP (2% of 100K divided by 10%).

Emotional discipline is the hardest part. Common mistakes include: averaging down into a losing position (throwing good money after bad), removing stop-losses hoping for a recovery, overtrading after a loss to "get even," and ignoring warning signals because you're emotionally attached to a stock. A written trading plan helps enforce discipline.