Brian Ferdinand is a Portfolio Manager and Trader at EverForward.
getty
Financial markets reward conviction, but they can punish certainty.
One of the most important lessons in professional trading is that being right about the direction of a market is only one part of the equation. A trader can correctly identify a trend and still lose money because the position was too large, the timing was poor or the risk was not properly defined.
That is why I believe the more useful question for professional investors is not, “Where is the market going?” It is, “What happens to my portfolio if I am wrong?”
That distinction becomes particularly important when markets are moving quickly.
The Federal Reserve’s May 2026 “Financial Stability Report“ noted that equity valuations remained toward the upper end of their historical range, corporate bond spreads remained relatively low and hedge fund leverage remained near historically high levels. Those conditions do not tell investors what happens next, but they illustrate why understanding exposure, leverage and liquidity can matter as much as having a market view.
Build The Risk Framework Before The Trade
It is easy to become focused on upside when an opportunity looks compelling. Professional risk management starts from the opposite direction.
Before entering a position, traders can define several things: how much capital they are prepared to risk, what would invalidate the original thesis, how the position interacts with the rest of the portfolio and what could happen if volatility suddenly increases. This creates a framework before emotions become involved.
A decision made while calmly evaluating an opportunity may look very different from a decision made while watching a position move rapidly against you. Establishing the parameters beforehand can reduce the temptation to improvise when circumstances become stressful.
The goal is not to eliminate losses. Losses are unavoidable in markets. The goal is to prevent an ordinary losing trade from becoming a portfolio-changing event.
Position Size Can Matter More Than Conviction
One of the most dangerous assumptions in trading is that greater conviction should automatically mean greater exposure. Conviction and risk are not the same thing.
A trader might have an excellent thesis and still encounter an unexpected macroeconomic announcement, liquidity event, earnings surprise or broader market dislocation. Markets do not have to invalidate the long-term thesis before creating significant short-term losses.
Position sizing gives traders room to be wrong.
That is especially important when leverage is involved. Leverage can increase capital efficiency, but it can also compress the amount of time available to respond when markets move sharply.
The Federal Reserve has repeatedly highlighted leverage and market liquidity as areas capable of amplifying financial-market stress. Its November 2025 report, for example, found that hedge fund leverage had reached historically elevated levels across strategies involving Treasuries, interest rate derivatives and equities.
For an individual portfolio manager, the broader lesson is straightforward: Risk should be measured by what can happen under unfavorable conditions, not merely by what normally happens.
Liquidity Is Part Of Risk Management
Investors often think about risk in terms of price. Professional traders also have to think about liquidity.
A position may look manageable when markets are orderly. During periods of stress, however, spreads can widen, market depth can decline and exiting a position can become more expensive. The Federal Reserve observed this dynamic during the market volatility of April 2025, when Treasury market liquidity deteriorated as volatility increased, even though markets continued functioning.
This is why liquidity should be considered before a position becomes difficult to exit. The relevant question is not simply, “Can I buy this?” It is also, “Under difficult conditions, how efficiently could I reduce this exposure?”
Separate The Thesis From The Ego
Perhaps the hardest part of trading is psychological. A position can easily become associated with the person who initiated it. Once that happens, changing your mind can feel like admitting failure.
I view that as dangerous.
A trade is a hypothesis based on the information available at a particular moment. When the information changes, the hypothesis may need to change with it. Strong traders do not need every original opinion to be validated. They need a repeatable process for identifying when the assumptions behind a position are no longer valid. That requires separating confidence from stubbornness.
Survival Creates Opportunity
Markets will always contain uncertainty. There will be unexpected economic data, geopolitical events, policy changes, earnings surprises and periods when relationships that appeared dependable suddenly break down. No risk framework can predict all of them.
What a disciplined framework can do is help ensure that one unexpected event does not determine the future of an entire portfolio. For professional traders, longevity is an advantage. Capital preserved today remains available for the opportunity that appears tomorrow.
That is why, over time, risk management may be less about avoiding volatility and more about maintaining the ability to participate through it.
Forbes Business Development Council is an invitation-only community for sales and biz dev executives. Do I qualify?
