Risk Management · Lesson 15 · Beginner

Via Negativa: The List of Prohibitions

You know the non-negotiable prohibitions and understand that avoiding is more important than clever setups.

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Prohibitions instead of tricks

The most effective risk management is a list of prohibitions, not of clever setups. Subtractive knowledge is more robust, and a few trades cause most of the losses.

Set the rule BEFORE you act, while your head is neutral. The first mistake is the cheapest.

Sign your personal list of prohibitions.

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Test yourself

Your short is going into the red. Which of these steps violates the list of prohibitions?

Let the stop trigger at 1R
Average down to improve your entry
Close the position and take a break

The key points at a glance

Subtractive knowledge is more robust, a few trades cause most of the losses.
Never without a stop, never soften the stop, never average down into a loss.
Set the rule BEFORE you act, while your head is neutral.

Deep dive

Why leaving things out beats the next setup

Beginners look for progress through addition: one more indicator, one more strategy. Taleb calls the more effective path via negativa, improvement by removing. You know more reliably what is wrong than what is right.

Schwager confirms it: across all the Market Wizards, risk control is the unanimous priority number one, not the method. A few forbidden actions cause most of the losses.

The non-negotiable prohibitions

Never trade without a hard stop: Elder calls this one of the two deadly mistakes.
Never loosen your stop, only trail it in the direction of the trade.
Never add to a loser: Jones' first rule, 'Don't ever average losers'.
Never go all-in, never raise leverage after losses, no revenge trading.
Schwartz: 'Never meet a margin call.' If you have to cut, the worst position goes first.

Set the rule in advance, not in the heat of the moment

You set every rule while your head is neutral, not while the position is bleeding. Taleb warns against casuistry, talking exceptions into existence after the fact. In an open loss your brain always finds a reason.

Elder: the first mistake is the cheapest. Get out at the first breach and you pay little tuition. Treat a rule break that happened to work out as a dangerous signal, not a success.

1R = your risk unit: the loss you have planned per trade (the distance from entry to stop-loss). +2R means: you won twice as much as you risked.

Sources: Taleb, Elder, Schwager, Goodman, Douglas

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