RISK is the possibility of loss. That is, if we own some stock, and there is a possibility of a price decline, we are at risk. In the matter of owning stocks, and aiming for profit, risk is fundamentally unavoidable and the best we can do is to manage the risk.
Risk management is to direct and control the possibility of loss. The activities of a risk manager are to measure risk and to increase and decrease risk by buying and selling stock.
The PROBABILITY of an event is the likelihood of that event. Our LUCK equals the probability of winning. Our PAYOFF equals 2:1 since we win 2 for every 1 we bet. Our RISK is the amount of money we wager.
Traders seem to spend considerable time and effort trying to change their luck and their payoff, generally to no avail, since it is not theirs to change. The risk is the only parameter the risk manager may effectively change to control risk.
A betting SYSTEM is a logical methods that defines a series of bets.
One interesting artifact of fixed-fraction betting, is that, since the bet stays proportional to the equity, it is theoretically impossible to go entirely broke so the official risk of total ruin is zero.
Pyramiding is a method for increasing a position, as it becomes profitable. While this technique might be useful as a way for a trader to pyramid up to his optimal position, pyramiding on top of an already-optimal position is to invite the disasters of over-trading.
Bet-it-all strategies are, by nature, almost-certain-death strategies.
In particular, one of the most important, and perhaps under-acknowledged dimensions of fund management is the UNCLE POINT or the amount of draw down that provokes a loss of confidence in either the investors or the fund management.
Risk-Basis position sizing considers the risk for each stock, where risk is the entry price minus the stop-out point.