What Is Risk Management?
Risk management is the discipline of identifying, measuring, and controlling exposure to losses in a trading account. It's what separates traders who survive from those who don't.
Core risk management practices:
- Position sizing based on percent of account (e.g., 1% risk per trade). - Stop losses on every position before entry. - Maximum daily loss limits that force shutdown of trading on bad days. - Maximum portfolio exposure caps (e.g., no more than 30% of account in single sector). - Correlation awareness — multiple positions in correlated assets aren't real diversification. - Drawdown management — reducing size after losses, increasing only after recovery.
The statistics are clear: most retail traders blow up not because they have bad strategies but because they lack risk management. A profitable strategy traded with poor risk management produces gains for months, then a single bad week wipes the account.
The winning mindset is "defense first." Make money slowly by losing slowly. Compounding 1% per week is wealth-building. Compounding 50% per month is fantasy.
Related terms
- Position Sizing — Determining how many shares or contracts to trade based on account size and risk tolerance.
- Stop Loss — A predefined exit price that limits losses if a trade moves against you.
- Drawdown — The peak-to-trough decline in account equity during a losing streak.