Updated August 2026 · Mike Shell, Chief Investment Officer

Predefined risk is deciding the maximum acceptable loss on a position before entering it. The exit is set in advance and the position size is derived from that exit — so the loss is a known quantity rather than something discovered afterward.

You cannot manage a number you never decided.

Why it matters. Most investors define the entry with great care and never define the exit at all. They research the company, form a view, decide what to pay — and then the position is simply held, with the size of a potential loss left to whatever the market decides it will be. It could be 8%. It could be 60%. Nobody knows, because nobody decided. That is the actual problem. Not that losses happen; losses always happen. The problem is that an undefined loss cannot be sized, cannot be aggregated, and cannot be managed. It can only be endured. Predefined risk removes the unknown: before capital is committed, two numbers already exist — where this position stops being valid, and what it costs to find out.

The math. Conventional sizing starts with a weight — five percent here, ten percent there — and the risk of that weight is unknown because no exit exists. Predefined risk runs the other direction: start with the loss and solve for the weight. Set the maximum the position may cost, measure the distance from entry to exit, and divide. On a $1,000,000 portfolio with a 0.50% position risk limit, the position may lose $5,000. If the stock is $100 and the exit is $92, the risk is $8 per share — 625 shares, a $62,500 position, or 6.25% of the portfolio. Change only the exit and everything changes: an exit at $96 risks $4 per share, which permits 1,250 shares and a $125,000 position. Same risk, double the exposure. The exit did that, not conviction. Notice what this does to the emotional part of investing — position size stops being an expression of how much you like something and becomes arithmetic.

How it’s applied in ASYMMETRY® Managed Portfolios. Every position enters with an exit already defined, derived from the structure of the market rather than a round number — average true range sets a distance wide enough that normal noise does not trigger it, a pivot low marks where the trend structure breaks, and anchored VWAP identifies where the average buyer from a meaningful reference point is underwater. Where those converge is the exit. The test is simple: if price reaches this level, was I wrong? Then those individual predefined losses are summed. That total is what the portfolio would lose if everything currently held hit its exit at once, and it is the number that gets managed — raised when conditions justify it, cut when they do not. One predefined loss is useful. All of them together is the reason for the exercise.

Common misconceptions. Predefined risk is not simply using stop-losses — a stop is one execution method, while predefined risk is the framework in which the exit is decided first and then drives position size; most people set stops afterward, at an arbitrary percentage, with no connection to how large the position should have been. It does not mean getting shaken out by normal volatility, because the distance is derived from measured volatility rather than a fixed percentage: in volatile conditions the exit sits further away and the position is correspondingly smaller, so the risk stays constant while the distance adapts. And it is not a guarantee. Price can gap through an exit overnight or on news, and in a fast, correlated decline several positions can hit exits at once and the aggregate can overshoot the modeled figure. Predefined risk narrows the distribution of outcomes dramatically. It does not eliminate the tail, and anyone claiming otherwise is selling something.

Related terms. Adaptive risk management — the system that governs the total these individual risks add up to. Adaptive portfolio management — the full process this sits inside. Asymmetric bet — what a position becomes once its downside is capped and its upside left open. Asymmetric drawdown and asymmetric hedging follow in the lexicon. Part of the ASYMMETRY® guide to asymmetric investing.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and portfolio manager of ASYMMETRY® Managed Portfolios, with nearly three decades of live-market experience across multiple full market cycles. His work has been featured in Forbes, Investor’s Business Daily, and Pensions & Investments.