What is risk management ?
Risk Management.
Risk management in trading is the process of identifying, assessing, and minimizing potential losses in order to protect your trading capital. It's a crucial part of successful trading because no trade is guaranteed to win, and managing losses is just as important as making profits.
Here are the key components of risk management in trading:
1. Position Sizing
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Deciding how much money to risk on a single trade.
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A common rule: risk no more than 1-2% of your total capital on any one trade.
2. Stop Loss Orders
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Pre-set levels to automatically exit a losing trade to limit losses.
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Helps remove emotion from trading decisions.
3. Take Profit Targets
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Levels where you automatically lock in profits once a trade hits a certain price.
4. Risk/Reward Ratio
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Compares the potential loss to the potential gain of a trade.
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A typical target is at least a 1:2 risk/reward ratio (risking $100 to potentially make $200).
5. Diversification
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Avoid putting all your capital into one trade or asset.
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Helps reduce the impact of one bad trade.
6. Leverage Control
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Using borrowed money can amplify both gains and losses.
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Risk management includes using leverage wisely to avoid large losses.
7. Emotional Discipline
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Sticking to your trading plan and risk rules, even after a loss or win.
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Emotional trading often leads to impulsive, risky decisions.
Why It's Important:
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Protects capital so you can keep trading.
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Reduces stress and emotional decision-making.
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Improves consistency and long-term success.
Even professional traders often lose 40–60% of the time — but good risk management helps ensure the wins outweigh the losses over time.
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