What is Risk Management?
Prices can go up, and prices can go down. One of the key parts to a successful trading plan is to ensure you manage your risk properly because, as any trader who’s been in the game for long enough will know, you can’t get it right every time.
In finance, risk is defined as the potential for the actual return on an investment to be lower than the expected return.
This includes the potential for loss and – if you’re trading using leverage – the potential to lose even more than you put in.
Risk management is a set of rules and measures you can put in place to ensure the impact of getting a decision wrong is manageable.
In fact, traders with particularly effective risk management strategies can still make money even if they lose more trades than they win. That’s because their winning trades are, on average, more profitable than their losses.