Risk Management Glossary — Every Term Defined (India)

Assignment risk Options risk

The risk that a short option is exercised against the seller, obliging them to deliver or take the underlying, which is most likely for in-the-money options near expiry. Assignment can create an unexpected position and margin demand overnight. also: exercise risk

Average drawdown Risk metric

The mean depth of all drawdown episodes, capturing the typical decline rather than the single worst one. It gives a fuller sense of the everyday discomfort of holding a strategy than the maximum drawdown alone.

Beta Risk metric

A measure of how much a position or portfolio moves with its benchmark, such as the Nifty 50. A beta of 1.5 implies roughly 1.5 times the index move, so beta quantifies market exposure and helps size a portfolio against a broad decline.

Black swan Portfolio

A rare, high-impact event that lies outside normal expectations and is rationalised only in hindsight, such as a sudden market crash. Because such events cannot be forecast, capital preservation and position limits, not prediction, are the defence. also: tail event

Breakeven win rate Risk metric

The win rate at which a strategy neither makes nor loses money for a given reward-to-risk ratio, equal to 1 divided by (1 plus R). At 2:1 reward-to-risk the breakeven win rate is about 33%, so any higher win rate is profitable before costs. also: breakeven hit rate

CAGR Risk metric

The compound annual growth rate, the constant yearly rate that would take starting capital to ending capital over the period. Being geometric it already reflects compounding, but quoted without a drawdown figure it hides the risk taken to earn it. also: compound annual growth rate

Calmar ratio Risk metric

Annualised return divided by the absolute maximum drawdown over the same period, usually three years. It expresses return relative to the worst peak-to-trough loss endured, but is dominated by that single deepest drawdown.

Capital preservation Core

The principle of protecting trading capital as the first priority, ahead of chasing returns, because a trader who runs out of capital is removed from the game permanently. Preserving capital keeps a trader in a position to compound whatever edge they have. also: preservation of capital

Circuit limits Market/India

Exchange-set price bands that halt or freeze trading in a stock or index when it moves a set percentage in a session. Circuit limits can trap a position by preventing an exit, so they are a real liquidity and gap hazard in Indian markets. also: price bands, circuit breaker

Compounding Position sizing

Reinvesting gains so that returns are earned on a growing base, which makes fixed-fractional sizing accelerate after wins. Compounding cuts both ways: because losses shrink the base, drawdowns compound too, which is why capital preservation protects the compounding engine.

Concentration risk Portfolio

The danger of having too much capital tied to a single instrument, sector or theme, so one adverse event can inflict an outsized loss. It is the opposite of diversification and a frequent cause of large, avoidable drawdowns. also: concentration

Conditional VaR Risk metric

The average loss in the worst cases beyond the VaR threshold, answering how bad it gets when the VaR level is breached. Because it captures the tail that VaR ignores, it is a more honest measure of extreme risk. also: CVaR, expected shortfall, ES

Correlation Portfolio

A measure between minus 1 and plus 1 of how two instruments move relative to each other. Positive correlation means positions add risk rather than diversify it, and correlations are unstable, often rising sharply during market stress. also: correlation coefficient

Cutting losses Discipline

Closing a losing trade at its predetermined stop rather than hoping it recovers. Because losses compound and require asymmetric gains to recover, disciplined loss-cutting is the single habit that most protects capital. also: honouring stops

Daily loss limit Algo risk

A hard cap on how much can be lost in one trading day, after which trading stops until the next session. It prevents a bad day from becoming a catastrophic one and interrupts the tilt that drives revenge trading. also: max daily loss, stop-for-the-day

Defined risk Options risk

A position whose maximum loss is known and capped at entry, such as a debit spread or a long option, so the worst case is bounded. Defined-risk structures make position sizing and portfolio heat straightforward to calculate. also: limited risk

Delta risk Options risk

The exposure of an option or options book to a change in the underlying price, measured by delta, the rate of change of option value per point moved. Aggregated across positions, net delta shows the directional risk a hedged book still carries. also: directional risk

Discipline Discipline

The consistent execution of a trading plan and its risk rules even when emotion, boredom or a losing streak argue otherwise. In practice, discipline in honouring stops and sizing matters more to survival than the quality of any individual entry. also: trading discipline

Diversification Portfolio

Spreading capital across positions that do not move together, so that the combined risk is lower than the sum of the parts. Genuine diversification requires low correlation, and it fails precisely in crises when correlations spike toward one.

Drawdown Risk metric

The decline in equity from a prior high-water mark at any point in time, expressed as a percentage or amount. A strategy spends much of its life in some level of drawdown between new equity highs, so tolerating it is part of trading. also: equity drawdown

Drawdown duration Risk metric

The time between an equity peak and the eventual recovery back to it, distinct from the depth of the drawdown. Long recovery periods test patience and discipline even when the depth is modest, and can outlast a trader's resolve. also: time under water, recovery time

Edge Core

A statistical advantage that makes a trading approach profitable on average over many trades, expressed as positive expectancy after costs. Without an edge, risk management can only slow the rate of loss, not create a profit. also: trading edge, statistical edge

Execution risk Algo risk

The risk that an order fills at a worse price, in the wrong size, or not at all, because of latency, thin liquidity or system faults. It causes live results to trail expectations and is a core operational risk in automated trading. also: operational execution risk

Expectancy Risk metric

The average profit or loss expected per trade, computed as win rate times average win minus loss rate times average loss. Positive expectancy after costs is the mathematical definition of an edge; no sizing rule can rescue a negative one. also: expected value per trade

Expected value Core

The probability-weighted average outcome of a decision repeated many times, found by summing each outcome multiplied by its probability. A trade with positive expected value is worth taking on average, even though any single instance can lose. also: EV, expectation

Expiry risk Options risk

The concentrated risk around an option's expiry, when gamma is highest, small moves swing profit and loss sharply, and settlement mechanics apply. On NSE weekly index expiries this makes late-day moves especially punishing for short-gamma positions. also: expiration risk

Exposure margin Market/India

An additional margin charged on top of SPAN margin as a further buffer against adverse moves in Indian derivatives. Together SPAN plus exposure margin is the total upfront margin a trader must maintain to hold an F&O position.

Fat-finger error Algo risk

A manual or configuration mistake that submits an order with the wrong price or a grossly oversized quantity. Pre-trade quantity and price checks and order-value limits exist specifically to catch such errors before they reach the market. also: fat finger

Fixed lot sizing Position sizing

Trading a constant quantity, for example always one Nifty lot, regardless of account size or stop distance. It is simple but leaves per-trade risk drifting as capital and price change, so a wide-stop trade risks far more than a tight-stop one. also: fixed quantity, fixed size

Fixed-fractional sizing Position sizing

Risking a constant fraction of current capital on every trade, so position size grows after gains and shrinks after losses. It compounds returns and cushions losing streaks, and it underpins the popular 1% and 2% risk-per-trade rules. also: fixed fractional, percent-risk sizing

FOMO Discipline

The fear of missing out that pushes a trader to chase a fast-moving market after the planned entry has passed, usually at a poor price with a distant stop. Acting on FOMO abandons the risk-reward that made the setup worthwhile in the first place. also: fear of missing out

Gamma risk Options risk

The risk that an option's delta changes quickly as the underlying moves, given by gamma. High gamma near expiry means a hedged position can become badly directional in a fast move, which is why short-gamma sellers face sharp losses in gaps.

Gap risk Market/India

The risk that a market opens far from its previous close, jumping past a stop-loss so the exit fills at a worse price. Overnight news and weekend events cause gaps, which is why a stop caps loss only when the market trades through it, not across a gap. also: gap-through risk

Gross exposure Portfolio

The sum of the absolute sizes of all long and short positions, measuring total capital deployed and implied leverage. A portfolio can be net-neutral yet carry large gross exposure, which still carries real risk if positions move against each other.

Half-Kelly Position sizing

Betting half the fraction the Kelly criterion prescribes, a common practical compromise. Because a live edge is only estimated, halving the Kelly bet sharply reduces drawdown and volatility while giving up only a small share of long-run growth. also: fractional Kelly, quarter-Kelly

Hedging Portfolio

Taking an offsetting position to reduce the risk of an existing one, such as buying index puts against a long equity book. A hedge lowers downside at the cost of premium or forgone upside, and it manages risk without predicting the outcome. also: hedge

Kelly criterion Position sizing

A formula that gives the bet fraction maximising the long-run growth rate of capital for a known edge, f* = W minus (1 minus W) divided by R. Full Kelly is highly volatile and assumes the edge is estimated exactly, so it is treated as an upper bound. also: Kelly formula

Kelly fraction Position sizing

The output of the Kelly criterion, the proportion of capital to risk given a win probability W and payoff ratio R. It is growth-optimal only if the inputs are exact, which they never are in trading, so most traders deliberately bet a fraction of it. also: f*, optimal fraction

Kill switch Algo risk

A control that immediately halts an automated strategy and cancels or flattens its orders when a preset limit, error or anomaly is breached. It is the last line of defence against a malfunctioning algorithm compounding losses in seconds. also: emergency stop, circuit stop

Latency risk Algo risk

The risk that delays between signal, order and fill cause a strategy to trade at stale prices or miss its intended level. It matters most for fast, short-horizon strategies and can turn a backtested edge into a live loss. also: latency

Letting winners run Discipline

Holding a profitable trade toward its target or trailing stop instead of taking gains prematurely. Combined with cutting losses short, it raises the payoff ratio and is the behavioural key to positive expectancy in trend-following.

Leverage Market/India

The use of borrowed capital or margin to control a position larger than the cash posted, amplifying both gains and losses. High leverage shrinks the adverse move needed to wipe out the account, making it a primary driver of risk of ruin. also: gearing

Liquidity risk Market/India

The risk of being unable to exit a position at a fair price because there are too few buyers or sellers, common in far out-of-the-money option strikes and small-cap stocks. It shows up as wide spreads and slippage precisely when an exit is most needed.

Loss asymmetry Core

The mathematical fact that recovering a loss requires a larger percentage gain than the loss itself, because the gain compounds on a smaller base. A 50% loss needs a 100% gain to recover, which is why avoiding deep drawdowns matters more than capturing big wins. also: asymmetry of loss, recovery asymmetry

Loss aversion Discipline

The well-documented tendency to feel the pain of a loss more strongly than the pleasure of an equal gain. It makes traders cut winners early and let losers run, the exact reverse of sound risk management, unless firm rules counteract it.

Lot size Market/India

The fixed number of units in one derivatives contract set by the exchange, for example 75 for a Nifty option or future. Lot size is the minimum tradable quantity, so it sets a floor on position risk that small accounts must respect when sizing. also: contract size

Margin Market/India

The capital a broker or exchange requires to open and hold a leveraged position, acting as collateral against losses. Trading near the margin limit leaves little cushion, so an adverse move can trigger a margin call or forced liquidation.

Margin call Market/India

A demand from the broker to add funds when losses erode the margin below the required level. Failing to meet it leads to forced squaring-off of positions at the market, often at the worst possible price, which is why a cash buffer is a risk control.

Mark-to-market Market/India

The daily revaluation of open positions to the current market price, with resulting profits credited and losses debited from the margin account. In Indian futures, MTM losses are settled daily, so a sustained adverse move demands fresh funds to hold the position. also: MTM

Martingale Position sizing

A doubling-up scheme that increases position size after each loss to recover prior losses in one win. It almost guarantees a catastrophic loss eventually, because a long enough losing streak exhausts capital, and it is a classic route to risk of ruin. also: averaging into losers

Maximum adverse excursion Risk metric

The largest unrealised loss a trade reached before it was closed, whatever its final result. Studying MAE across trades helps set stop distances that are wide enough to avoid noise but tight enough to protect capital. also: MAE

Maximum drawdown Risk metric

The largest peak-to-trough decline in equity before a new peak is reached, usually stated as a percentage. It is the core measure of pain and of how much capital a strategy can put at risk, and it defines survivability more than return does. also: max drawdown, MDD

Maximum favourable excursion Risk metric

The largest unrealised profit a trade reached before it was closed. Comparing MFE with the realised result shows how much profit was given back and informs where profit targets or trailing stops might sit. also: MFE

Model risk Algo risk

The risk that a strategy underperforms because its underlying model is wrong, mis-specified or fitted to noise. It includes overfitting a backtest and assuming a past relationship will persist, and it is managed by validation and conservative sizing rather than eliminated.

Net exposure Portfolio

The difference between long and short exposure in a portfolio, indicating its directional bias to the market. A market-neutral book runs near zero net exposure, while a heavily net-long book behaves much like the index it tracks.

Notional value Position sizing

The full market value a position controls, equal to price times quantity times the multiplier, as opposed to the margin posted or the money at risk. Sizing off notional rather than stop distance is a common way traders unknowingly take on excessive risk. also: notional exposure

Order throttle Algo risk

A limit on how many orders an algorithm may send per second or per interval, protecting against runaway loops that flood the exchange. Rate limits are a standard risk control that also help satisfy exchange order-to-trade requirements. also: rate limit, order rate limit

Overnight risk Market/India

The exposure of a position held past the close to news and global moves that occur while the market is shut. Because stops cannot act overnight, traders reduce size or hedge before the close to control the gap that may greet the next open. also: carry risk

Overtrading Discipline

Taking more trades than a strategy warrants, often from boredom, impatience or a need for action. It multiplies transaction costs and exposure to noise, so an edge that exists on selective trades can be traded away by excessive activity.

Payoff ratio Risk metric

The average winning trade divided by the average losing trade, measuring how large wins are relative to losses. A low win rate can still be profitable if the payoff ratio is high enough, which is why trend strategies tolerate many small losses. also: win-loss ratio, average win/loss

Peak margin Market/India

A SEBI framework requiring brokers to check that clients hold the full required margin at random snapshots through the day, not just at order time. It limits intraday leverage and penalises shortfalls, tightening the real risk capacity of Indian traders. also: peak margin norms

Percentage-risk model Position sizing

A sizing method that first fixes the money at risk as a percentage of capital, then derives quantity as that risk divided by the stop distance times the point value. It ties position size to where the trade is proven wrong rather than to a fixed lot count. also: percent-risk model, risk-based sizing

Pin risk Options risk

The uncertainty a short option seller faces when the underlying settles very close to the strike at expiry, leaving it unclear whether the option will be assigned. It can leave a trader with an unhedged position when the market reopens.

Point value Position sizing

The currency change in a position for a one-point move in the underlying, equal to the lot or contract multiplier. For a Nifty lot of 75, one index point is worth ₹75, which converts a stop distance in points into a rupee risk. also: tick value, multiplier

Portfolio heat Portfolio

The total capital at risk across all open positions if every stop were hit at once, usually expressed as a percentage of equity. Capping total heat, often near 6% of capital, prevents a cluster of correlated stops from causing a severe drawdown. also: total risk exposure, open risk

Portfolio risk Portfolio

The total risk of all open positions considered together, which depends on their correlations, not just the sum of individual trade risks. Correlated positions can lose at once, so portfolio risk can be far larger than any single position suggests. also: aggregate risk

Position limits Portfolio

Predefined caps on how large any single position or group of related positions may become, whether in lots, notional value or percentage of capital. They stop a single conviction trade from growing until it can sink the whole account. also: exposure limits

Position sizing Position sizing

Deciding how many shares, lots or contracts to trade on a given signal based on capital, risk per trade and the distance to the stop. It usually influences long-run results and the shape of drawdowns more than the entry rule itself. also: trade sizing

Probability Core

The likelihood of an event, expressed between 0 and 1, that underlies every risk calculation. Sound trading treats each position as one draw from a distribution of outcomes rather than a certainty, which is the core of thinking in probabilities.

Profit factor Risk metric

Gross profit divided by gross loss across all trades. A value above 1 means the set of trades made money, but a single large winner can inflate it, so it needs a reasonable sample and realistic costs to be meaningful. also: PF

Pyramiding Position sizing

Adding to a winning position in stages as it moves in the trader's favour, ideally with the combined stop kept within the original risk budget. Done carelessly it converts a modest winner into an oversized position exposed to a sharp reversal. also: scaling in, adding to winners

R-multiple Risk metric

A trade result expressed in units of the initial risk taken, where 1R is the amount risked to the stop. A trade that gains twice its risk is +2R and one stopped out is minus 1R, which normalises outcomes across trades of different sizes. also: R, R multiple

Recovery to par Risk metric

The percentage gain required to climb back to breakeven after a drawdown of depth D, equal to 1 divided by (1 minus D) minus 1. A 20% loss needs 25%, a 50% loss needs 100%, and a 90% loss needs 900%, illustrating loss asymmetry. also: gain to recover, recovery percentage

Revenge trading Discipline

Entering impulsive trades to win back a recent loss, usually with oversized positions and no plan. It is driven by emotion rather than edge and is a leading way traders convert a manageable loss into a serious drawdown. also: revenge trade

Reward-to-risk ratio Risk metric

The ratio of a trade's profit target distance to its stop distance, for example a 60-point target against a 30-point stop is 2:1. Together with the win rate it determines expectancy, and it sets the breakeven win rate a strategy must clear. also: reward-risk ratio, R:R, risk-reward ratio

Risk Core

The possibility that an outcome differs from what was expected, especially the chance and size of a loss. In trading it is usually quantified as how much capital is exposed and the probability of losing it, not merely a vague sense of danger. also: downside risk

Risk management Core

The discipline of measuring, limiting and controlling the money a trader can lose, so that no single trade or losing streak can end the account. It improves the odds of long-term survival, but never guarantees profit. also: trading risk management

Risk of ruin Risk metric

The probability that a run of losses reduces capital below a level at which trading can no longer continue. It rises sharply with larger position sizes and thin or negative expectancy, and is best read as a comparative guide rather than an exact figure. also: probability of ruin, RoR

Risk parity Portfolio

An allocation approach that gives each holding an equal share of portfolio risk rather than an equal share of capital, so a volatile instrument gets less money than a calm one. It smooths the risk contribution across positions but can concentrate capital in low-volatility assets.

Risk per trade Position sizing

The fixed amount, in currency or as a percentage of capital, that a trader is willing to lose if a single trade hits its stop. Keeping it small and constant is what lets an account survive an inevitable string of losses. also: risk amount, R

Risk tolerance Discipline

The amount of loss and volatility a trader can accept financially and emotionally without abandoning their plan. Sizing beyond one's true risk tolerance leads to panic exits at the worst moment, so honest self-assessment precedes sizing decisions. also: risk appetite

Risk-reward tradeoff Core

The principle that higher potential return generally comes with higher potential loss, so no strategy can maximise reward and minimise risk at once. Good decisions weigh the two together rather than chasing return in isolation. also: risk-return tradeoff

SEBI Market/India

The Securities and Exchange Board of India, the regulator of Indian securities and derivatives markets. Its rules on margins, position limits, product suitability and peak-margin reporting directly shape the leverage and risk retail traders may take. also: Securities and Exchange Board of India

Sector risk Portfolio

The exposure that arises when several positions belong to the same sector, such as banking or IT, and therefore respond to the same drivers. Holding many names in one sector feels diversified but behaves like one large correlated bet. also: industry risk

Securities Transaction Tax Market/India

A tax levied on trades in Indian securities and derivatives, charged per transaction and varying by segment and side. Because it applies to every trade, STT quietly erodes the edge of high-frequency and small-target strategies and must be counted as a cost. also: STT

Sharpe ratio Risk metric

A risk-adjusted return measure equal to excess return divided by the standard deviation of returns, often annualised. It rewards consistency and penalises volatility, but treats upside and downside swings alike and assumes roughly normal returns.

Single-trade risk Core

The amount of capital that can be lost on one position, defined by the stop distance times the quantity times the point value. Controlling it is the atomic unit of risk management, since portfolio risk is built up from individual trade risks. also: per-trade risk

Slippage Algo risk

The difference between the price a strategy expected and the price at which the order actually filled. It grows with order size, thin liquidity and fast markets, and steadily erodes an edge that looked clean on paper.

Sortino ratio Risk metric

A variant of the Sharpe ratio that divides excess return by downside deviation only, ignoring upside volatility. It better matches a trader's real concern with losses, and comparing it to the Sharpe reveals how much of the volatility is favourable.

SPAN margin Market/India

The core margin for F&O positions on NSE, computed by the SPAN system as the largest loss a portfolio would suffer across a set of simulated price and volatility scenarios. It is portfolio-based, so hedged positions attract less margin than naked ones. also: SPAN

Standard deviation Risk metric

A measure of how far returns typically spread around their mean, and the usual proxy for total risk. It understates tail risk when returns are not normally distributed, so a low standard deviation can still hide the chance of a large, rare loss. also: sigma, σ

Stop distance Position sizing

The gap in points or rupees between the entry price and the stop-loss, which sets how much a single unit can lose. Dividing the money at risk by the stop distance times the point value yields the position size. also: stop width, risk per unit

Stop-loss Core

A predetermined exit price at which a losing trade is closed to cap the loss. It converts an open-ended risk into a known, bounded one and is the reference point from which risk-based position size is calculated. also: stop, protective stop

Systematic risk Portfolio

Market-wide risk that affects nearly all instruments and cannot be removed by diversification, such as an interest-rate shock or a broad selloff. It is measured by beta and can only be reduced by lowering overall exposure or hedging. also: market risk, undiversifiable risk

Tail risk Portfolio

The risk of rare, extreme moves in the far ends of the return distribution that standard measures like standard deviation understate. Real market returns have fatter tails than the normal distribution, so large losses occur more often than models predict. also: fat-tail risk

Theta risk Options risk

The exposure to time decay, measured by theta, the value an option loses per day as expiry approaches. It benefits option sellers and works against buyers, and it is the counterpart traders accept in exchange for gamma exposure. also: time-decay risk

Tilt Discipline

An emotional state, borrowed from poker, in which frustration or overconfidence pushes a trader to abandon their rules and take reckless trades. Recognising tilt and stepping away, often enforced by a daily loss limit, prevents an ordinary loss from spiralling. also: emotional tilt

Trading journal Discipline

A record of every trade with its rationale, size, risk, outcome and emotional state, kept for review. It turns experience into feedback, exposes recurring mistakes such as oversizing or breaking stops, and is the main tool for improving discipline. also: trade log, trade diary

Trading plan Discipline

A written set of rules covering setups, entries, exits, position sizing and risk limits, decided before the market opens. Following a plan replaces in-the-moment emotion with predefined decisions and is the backbone of consistent risk control. also: trading rules

Ulcer index Risk metric

A downside risk measure equal to the root-mean-square of drawdown depths over time, penalising deep and prolonged declines more than shallow ones. Because it only counts drawdowns, it captures the discomfort of holding a strategy better than standard deviation. also: UI

Uncertainty Core

The condition of not knowing a future outcome, distinct from risk in that its probabilities may themselves be unknown. Markets are uncertain, so risk management works with distributions and odds rather than predictions of what will happen next.

Undefined risk Options risk

A position whose maximum loss is not capped, such as a naked short option or short future, where an adverse move can exceed the capital posted. Undefined-risk trades demand strict sizing and stops because a single gap can be ruinous. also: unlimited risk, naked risk

Unsystematic risk Portfolio

Risk specific to one instrument or company, such as a fraud or an earnings miss, that diversification can reduce. Because it is not compensated for once diversified away, holding concentrated single-name exposure adds risk without extra expected return. also: specific risk, idiosyncratic risk

Value at Risk Risk metric

An estimate of the maximum loss not exceeded over a set horizon at a given confidence level, for example a 1-day 95% VaR of ₹40,000. It summarises risk in one number but says nothing about how bad losses can get in the remaining tail. also: VaR

Variance of outcomes Core

The spread of possible results around their average, reflecting how much individual trades can differ from the expected value. High variance means long winning and losing streaks are normal even with a positive edge, which is why sizing and survival matter. also: dispersion

Vega risk Options risk

The sensitivity of an option's value to a change in implied volatility, measured by vega. A position can be right on direction yet lose money if implied volatility falls, so vega risk matters especially around events and expiry. also: volatility risk

Volatility Risk metric

The degree of variation in price or returns, usually measured by the annualised standard deviation of period returns. It is a common input to position sizing and the denominator of the Sharpe ratio, but treats up and down moves symmetrically. also: return volatility

Volatility-based sizing Position sizing

Sizing each position inversely to its recent volatility, often via the ATR, so that every trade contributes a similar amount of risk. It stabilises the equity curve versus fixed-quantity sizing but reacts to changing volatility with a lag. also: ATR sizing, volatility targeting

Why traders fail Core

The common causes of trader failure, chiefly oversized positions, no stop discipline, negative expectancy and letting emotion override rules, rather than a lack of good entries. Most blown accounts trace to risk mistakes, not to poor market forecasts.

Win rate Risk metric

The fraction of trades that close profitable. A high win rate is neither necessary nor sufficient for profitability, because it says nothing about the size of wins versus losses; it must be read with the payoff ratio. also: hit rate, win percentage