Risk Management: Core Rules

Why Does Risk Management Matter?

Risk management is the set of strategies applied to protect investment capital and keep potential losses under control. Sizing positions correctly, using Stop Loss, controlling leverage, and sticking to a trading plan are the core elements of effective risk management.

Core Rules

One trait shared by successful investors is the disciplined and consistent application of risk management practices:

• Only risk a small portion of your capital on any single trade
• Don't neglect to use Stop Loss
• Don't trade on emotional decisions
• Stick to your trading plan
• Use leverage in a controlled way

Position Sizing

Position size refers to the lot amount used in a trade. Because potential loss can grow along with potential gain as position size increases, it's important to set lot size in line with your capital and risk management plan.

When determining position size, account size, risk tolerance, and Stop Loss distance should all be considered together.

Stop Loss

A Stop Loss is an order designed to automatically close a position once the market price reaches a level set by the investor.

Using a Stop Loss can help limit risk. However, keep in mind that fast price movements, low liquidity, or price gaps may cause the order to be executed at a level different from the one specified.

Take Profit

Take Profit is an order type that automatically closes an open position once the price reaches the investor's target level. It helps set profit targets in advance and supports disciplined execution of a trading plan.