Bernoulli
Expected utility (1738). People fear losses more than they enjoy equivalent gains. Losing $1,000 hurts more than winning $1,000 feels good — plan for that asymmetry in your own reactions, not just in the math.
These are original study notes, not a reproduction of the course. The course belongs to its creator; this page is for personal education and practice, not financial advice. The central idea running through the whole course: you can never know if a trade will succeed, but you can always choose exactly how much you lose if it fails. Risk management is that choice, made deliberately instead of by accident.
00 / What the course covers
The roadmap
First, what risk actually is and why survival comes before profit. Then the classical foundations behind modern risk management. Then the practical core: win rate, risk-to-reward, and the expectancy formula. Then stop-loss and take-profit types, position sizing, and how one type of risk trades off against another.
Risk vs. uncertainty
Uncertainty is simply not knowing what happens next — it cannot be removed, no matter how good the setup or the strategy. Risk is the part of uncertainty you can measure and choose: you can never know if a trade will succeed, but you can always calculate exactly how much you lose if it fails. Risk management exists to master that one controllable part.
Survive first, profit second
Long-term traders are slow ships, not speedboats. An overleveraged trader without real risk management might move faster in calm conditions, but a storm eventually comes — and without risk management in place, that storm can end the account entirely. Be the slow, steady boat that survives the storm, not the fast one that cannot handle it.
Four classical foundations
Markowitz
Portfolio risk. Won a Nobel prize showing risk, not just return, defines a portfolio. Combining assets whose risks offset each other (like an umbrella company and a sunscreen company) reduces overall risk without needing to predict the weather.
Kelly
Optimal bet size. A formula for how much to risk for maximum long-term growth. Beautiful in theory, but built for a perfect world — real markets are manipulated and imperfect, so treat full Kelly as a theoretical ceiling, not a rule to trade by.
Taleb
Antifragility (2012). Most systems are fragile (a wine glass breaks under stress); an antifragile system gets stronger under stress (a muscle). Build a trading process that improves after drawdowns instead of shattering.
The asymmetry of profits and losses
A loss requires a proportionally bigger gain to recover from it — and the bigger the loss, the worse that gets:
| Loss | Gain required to recover |
|---|---|
| 10% | 11% |
| 50% | 100% |
| 77% | ~350% (Bitcoin's 2021–2023 drawdown, verified on the actual chart) |
| 90% | ~900% |
The takeaway: avoiding big losses matters more than chasing big wins. A string of solid wins can be undone by a single 90% loss in a way that no amount of future winning easily reverses. Trading is more about protecting the downside than chasing the upside.
01 / The practical core
Win rate, risk:reward & expectancy
Win rate alone is meaningless
A 30% win rate can be profitable, and an 80% win rate can lose money. An 80%-win-rate trader who wins $100 but loses $1,000 on the 20% of trades that fail will still lose money overall. Win rate only means something next to the size of the wins and losses.
Risk-to-reward (R:R)
Reward divided by risk. Win $100, risk $50, and your R:R is 2. The higher the R:R you can plan for on a given setup, the less often you need to win to come out ahead.
Break-even win rate
break-even win rate = 1 ÷ (1 + R:R)
At a 3:1 R:R, break-even win rate = 1/(1+3) = 25%. Win more than a quarter of the time at that ratio and you're profitable.
Expectancy — your real edge per trade
expectancy = (win rate × average win) − (loss rate × average loss)
Worked examples from the course's own calculator: a 50% win rate with a $100 average win and $100 average loss nets exactly $0 expectancy — a coin flip with even stakes goes nowhere. Push the win rate to 66% at the same $100/$100 stakes and expectancy becomes about $32 per trade (~$640 over 20 trades, ~$7,680/year at 20 trades/month). Keep the 66% win rate but move to a 2:1 R:R (win $200, lose $100) and expectancy jumps to roughly $100 per trade (~$2,000 over 20 trades, ~$23,500/year at that pace) — and the break-even win rate at 2:1 is only 33%, so you don't need to win often, you need your wins bigger than your losses.
Try it yourself: the Calculator page's expectancy tool reproduces this exact model — plug in your own win rate, average win, average loss, and trades/month to see your real edge before you trade it live.
02 / The long game
The magic of compounding
Growth builds on the previous growth: $100 growing 10% becomes $110, then the next 10% grows $110 (not $100) into $121. Small at first, but this is the mechanism that turns a small, real trading edge into life-changing wealth over years — and it is also exactly why time in the process, not the size of any single return, is the dominant factor in the compound-interest formula. A trader compounding steadily for years beats a trader who makes bigger returns for only a few years.
Charlie Munger's rule: never interrupt compounding unnecessarily. Every dollar withdrawn to live off trading, or to buy something today, is a dollar that stops compounding for you. The course's illustration: a trader who reinvests profit grows on an accelerating curve, while a trader who withdraws (say) 90% of every gain grows on a much flatter one — the gap widens every year. This doesn't mean never take money out; it means treat withdrawing profit to live off trading as the most expensive habit a trader can build, and default to reinvesting.
Where this shows up in your journal: the trade journal's optional "reinvest %" field on each winning trade is this exact idea made concrete — a place to record what you actually reinvested vs. withdrew, trade by trade, since the plan is rarely "reinvest 100% forever," it's "reinvest most of it, most of the time, on purpose."
03 / Every trade has three risks
Capital, positional & target risk
Every single trade carries three distinct kinds of risk, and the key lesson is that you cannot eliminate risk — you can only move it from one type to another.
Capital risk
How much money you lose if your stop is hit. Buy at $100,000, stop at $99,000: capital risk is $1,000.
Positional risk
The chance your stop gets hit at all. A tighter stop lowers capital risk but raises positional risk (more likely to get clipped by noise before the move plays out).
Target risk
The chance you make less profit than the trade was capable of — missing your target, or scaling out too early.
The trade-off in practice: widen a stop and capital risk goes up while positional risk goes down; move a stop to break-even once in profit and you erase capital risk but the position risk of getting stopped on noise goes up. There is no version of a trade with zero risk of every kind at once — only a choice of which kind you'd rather carry.
Stop-loss types
Technical
Placed where the trade idea is actually invalidated — typically just beyond a swing high/low, support/resistance, or supply/demand zone.
Volatility (ATR)
Sized off the Average True Range. A common rule of thumb: stop distance ≈ 1.5–2× the ATR at entry.
Combined
Technical level plus a small ATR-based wiggle room (≈ 0.25–0.5× ATR) beyond it, so normal noise around a level doesn't stop you out of an otherwise-correct idea.
Avoid mental stops. "I'll sell if it hits X" without an actual order placed is not a stop-loss — it's a promise you may not keep under pressure. Always place a hard stop the platform enforces automatically.
Try it yourself: the Calculator page's ATR stop-loss helper applies these exact multipliers to your entry price and ATR reading.
Take-profit types
Fixed R multiple
Target is a fixed multiple of the stop distance — e.g. a 2:1 target is twice the entry-to-stop distance, measured from entry.
Technical target
Placed just before the next major support/resistance, supply/demand, or liquidity zone — exit ahead of the zone, since that's usually where opposing pressure shows up.
Dynamic target
Trails the move using a channel, Bollinger Bands, or a pitchfork, to extend a target as a strong trend continues rather than capping it too early.
A pro tip worth remembering: if a technically valid setup has a strong opposing level sitting right on top of the entry, it can be better to skip the trade entirely rather than take a technically "correct" entry with no room to work.
Sources
What this page covers
These notes summarize the user-supplied transcript through its "Take Profit Types" chapter. The course's own intro also promises deeper coverage of position-sizing models (including the Kelly criterion in more depth) and dedicated risk-transformation techniques — the "Three types of risk" section above is that risk-transformation idea in its simplest form, but if more of the transcript is supplied later, this page can be extended rather than guessing at chapters that weren't actually provided.