Risk Management

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Risk Management

Risk management is the management of risk inherent in trading by identifying these risks, assessing them and knowing how to control them. You can't control how much you may profit on each trade, but you can control how much you may lose. Poor risk management is one of the top reasons traders fail. Managing your risk exposure, by knowing what to do and what not to do, helps to prevent deep drawdowns or losing your trading capital. There is a variety of potential risks to take into account.

Good risk management is key to capital preservation and involves thinking about how much capital to employ, how much to risk on each trade, how many trades to make daily, weekly and monthly and what stop levels to use for each type of set-up. Also included in good risk management are what reward / risk requirements to enforce, how to employ money management, how to use a balanced portfolio and how to deal with correlations between open trades. Traders employing good risk management also consider what loss limits to set daily, weekly and monthly, how to calculate the overall expectancy of your trading strategy and how to avoid the risk of ruin.
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