The fundamental rule is capital preservation; before you can make money, you must protect the money you already have. This starts with position sizing, which is the process of calculating the appropriate amount of capital to risk on any single trade.

A common practice is to risk only a small percentage (e.g., 1-2%) of your total portfolio on a single position, ensuring that a single loss will not be devastating. One of the most important tools for risk management is the stop-loss order. A stop-loss is an automated order that sells an asset when it reaches a predetermined price, thereby limiting your potential loss on a trade.

For example, if you buy a stock at $50.00 and set a stop-loss at $48.00, your position will be automatically sold if the price drops to or below that level. Finally, diversification is a key principle of risk management.

By spreading your investments across different sectors, asset classes, and geographical regions, you reduce the risk that a single negative event will impact your entire portfolio.