What’s meant by ‘risk’ in trading?

In trading, ‘risk’ refers to the possibility of your choices not resulting in the outcome that you expected. This can take the form of a trade not performing as you’d thought it would, meaning that you make less – or indeed, lose more – than originally anticipated.

Trading risk comes in a range of forms. The most common is ‘market risk’, the general risk that your trades might not perform based on unfavourable price movements – affected by a range of external factors like recessions, political unrest and so on.

Traders are usually prepared to take on some degree of risk in order to participate in the markets, and hopefully make their trading profitable over time. How much trading risk they’ll take on depends on their strategy, and the risk-reward ratio they’ve set for themselves.

It’s therefore important to recognise how much capital you can stand to risk, both on a per-trade basis and as a whole over time.

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