Day Trading Risk Management

Question 1

What is the primary purpose of a stop-loss order in day trading?

Accepted Answer

To limit the maximum loss on a trade

Answer

To lock in profits automatically

Answer

To increase position size

Answer

To delay trade execution

Question 2

The '1% rule' in day trading risk management states that a trader should risk no more than:

Accepted Answer

1% of total account equity per trade

Answer

1% of the stock's price per trade

Answer

1% of daily trading volume

Answer

1% of the broker's margin requirement

Question 3

What does a risk-to-reward ratio of 1:3 mean?

Accepted Answer

You risk $1 to potentially make $3

Answer

You risk $3 to make $1

Answer

You win 3 out of every 4 trades

Answer

Your stop-loss is 3 times your target

Question 4

Which of the following best describes 'drawdown' in day trading?

Accepted Answer

The peak-to-trough decline in account value

Answer

The daily profit target

Answer

The amount withdrawn from a brokerage account

Answer

The margin used for a leveraged position

Question 5

A trader has a $10,000 account and uses the 2% risk rule. What is the maximum dollar amount they should risk per trade?

Accepted Answer

$200

Answer

$20

Answer

$100

Answer

$500

Question 6

What is 'position sizing' in the context of day trading risk management?

Accepted Answer

Determining how many shares to buy based on risk tolerance

Answer

Choosing the largest possible trade to maximize gains

Answer

Setting the bid-ask spread for a security

Answer

Calculating the margin required by the broker