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Risk management definition
Risk management is the overall process of controlling how much of your capital is exposed to loss across your trading. It is the discipline that keeps any single trade, or a run of losing trades, from doing lasting damage to the account.
Risk management combines position sizing, stop-loss placement, leverage control, diversification, margin monitoring, and risk-reward planning into a consistent set of rules. You fix loss limits before entering, both per trade and across the account, then size each position to stay inside them. The rules apply the same way whether the last trade won or lost.
Risk management is the whole framework, broader than either of its parts. Risk assessment is the step inside it that measures the risk of a given trade, and risk mitigation is the set of specific actions that reduce a risk once it is measured. Management is the continuing process that applies both, trade after trade.
Risk management Example
You have a USD 10,000 account and set a rule to risk 1% per trade.
The maximum risk on one trade is:
USD 10,000 √ó 1% = USD 100
You then size each position so that, if the stop-loss triggers, the loss stays at USD 100. Applied to every trade, the rule caps how fast the account can fall during a losing streak.
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