int
Course overview
1. Why is risk management important to traders?2. How much should you risk on a trade?3. Applying a stop-loss, take-profit, and trailing stop4. Finding the right broker5. Conclusion1. Why is risk management important to traders?
Level
Beginner’s
Time
15 minutes
Quiz
Test your skills
Course summary
Losses are inevitable in trading, even with a winning strategy. There are things you can do, however, to control your risk and mitigate potential losses. In this introduction to risk management in trading, we will show you how to calculate your lot size, determine your risk limit, and apply a stop-loss.
Applying risk management strategies is essential when you use leverage to trade. Leverage can maximise your exposure to the markets, and although it can multiply your gains, it can also amplify your potential losses. Risk management has several key advantages, including:
- Reduced possibility for margin calls: Effective risk management could reduce the likelihood of the dreaded margin call, which occurs when a trader's account falls below the required margin level, potentially leading to the forced liquidation of positions.
- Helps navigate market volatility: Risk management sets limits on potential losses and ensures traders do not expose themselves to excessive risk. This is particularly helpful during periods of increased market volatility, when sudden price swings can cause surprise losses.
- Portfolio diversification: Risk management involves diversifying trading positions across different assets or markets. Diversification helps spread risk and reduces the impact of adverse movements in any single asset or market on the overall trading portfolio.
Ignoring a margin call
Ignoring a margin call can have serious consequences. Your broker may be forced to initiate a margin closeout, selling your investments to meet the minimum account value requirement. This could lock in losses and leave you with less money than you started with.
Quiz
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