What is Risk Management?
Risk management is the systematic approach to identifying, evaluating, and mitigating potential trading losses. It involves using various tools and strategies to protect trading capital while maximizing potential returns.
Key Components
Position Sizing
- Percentage of portfolio per trade
- Risk per trade calculation
- Account risk limits
- Correlation management
Protection Mechanisms
- Stop loss orders
- Take profit targets
- Position diversification
- Leverage limits
Risk Management Rules
Common Guidelines
- Never risk more than 1-2% per trade
- Use proper position sizing
- Always use stop losses
- Plan trades in advance
- Monitor overall exposure
Advanced Concepts
- Portfolio correlation
- Risk-adjusted returns
- Drawdown management
- Risk-reward optimization
Related Terms
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