What Is Risk Management?
Risk management is the systematic process of identifying, assessing, and controlling risks in trading. It encompasses: position sizing (how much to risk per trade), stop-loss placement (where to exit if wrong), portfolio-level risk limits (maximum exposure, maximum drawdown), and operational risk management (exchange security, custody).
How Risk Management Works
The core principles of risk management: never risk more than 1-2% of capital per trade, define your maximum acceptable drawdown before trading, ensure no single position exceeds 10-20% of portfolio, diversify across uncorrelated assets and strategies, and always know your worst-case scenario before entering a trade. These rules aren't suggestions — they're survival requirements.
Why It Matters for Traders
Risk management is the single most important determinant of long-term trading success. A mediocre strategy with excellent risk management will survive and compound. An excellent strategy with poor risk management will eventually blow up. Every legendary trader who blew up (LTCM, Three Arrows Capital) did so because they abandoned risk management principles during a period of overconfidence.