Day Trading Risk Management 2

Question 1

What is a 'trailing stop' and how does it differ from a fixed stop-loss?

Accepted Answer

A trailing stop moves with price to lock in profits; a fixed stop stays at the original level

Answer

A trailing stop adjusts upward as price rises, locking in gains, while a fixed stop-loss remains at its original price.

Question 2

Which trading scenario demonstrates proper risk management?

Accepted Answer

Limiting each trade's risk to a fixed percentage of account equity

Answer

Limiting risk to a fixed percentage per trade preserves capital and prevents account blow-ups from a string of losses.

Question 3

What does 'overtrading' refer to in day trading?

Accepted Answer

Executing too many trades, often driven by emotion rather than strategy

Answer

Overtrading occurs when a trader takes excessive trades, often emotionally driven, leading to increased costs and poor decision-making.

Question 4

In day trading, 'leverage' amplifies both gains and losses. If a broker offers 4:1 intraday leverage and a trader uses it fully, a 1% adverse move results in a:

Accepted Answer

4% loss

Answer

At 4:1 leverage, a 1% adverse price move results in a 4% loss on the trader's actual capital.

Question 5

What is the purpose of a 'daily loss limit' for day traders?

Accepted Answer

To automatically stop trading after losses exceed a preset threshold

Answer

A daily loss limit halts trading once cumulative losses hit a set amount, preventing emotional revenge trading.

Day Trading Practice Test

Day Trading Practice Test

Day Trading Risk Management 2