The process of identifying, analyzing, and accepting or mitigating uncertainty in investment decisions.
Risk management is the systematic process of identifying, analyzing, and mitigating capital risks in trading. It is the single most critical factor that distinguishes professional traders from gamblers.
Risk management involves setting clear rules before you trade: deciding your maximum risk per trade (e.g., 1% of capital), using stop-losses on every trade, determining optimal position sizes, and maintaining a positive risk-to-reward ratio (at least 1:2) so your winners cover your losers.
No trading strategy wins 100% of the time. Without risk management, a string of consecutive losses (which happens to every trader eventually) can wipe out your entire capital. Proper risk control guarantees that you survive drawdown phases and stay profitable over the long run.
You have a trading account of ₹1,00,000. Your risk management rule is to never risk more than 1% (₹1,000) on a single trade. If you want to buy a stock at ₹100 with a stop loss at ₹95 (risking ₹5 per share), your position size limit is 200 shares (200 * ₹5 = ₹1,000 risk), rather than buying as many shares as your margin allows.
The 1% rule dictates that you should never risk more than 1% of your total trading account balance on any single trade. If you have ₹50,000, your maximum risk per trade should be ₹500.
Practice trading stocks with live NSE/BSE market prices and ₹10,00,000 in virtual capital on Arthhwise.
Download Free Android AppAn order placed with a broker to buy or sell a security once it reaches a specific price, designed to limit investor loss.