Risk Management is the process of identifying, assessing, and controlling financial risks to protect your investment portfolio. It is a critical discipline in trading and investing, aimed at reducing potential losses while maximizing potential gains. One of the cornerstone principles of risk management is to never risk more than 2% of your portfolio on any single trade. This means if your portfolio is worth $10,000, you should not risk more than $200 on a trade, including potential losses from stop-loss orders or position sizing.
Following this 2% rule helps preserve your capital during downturns, prevents emotional decision-making, and ensures you can recover over the long term, even after multiple unsuccessful trades. Remember, effective risk management is not optional—it is key to sustainable success in the financial markets.
