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

A stop-loss order automatically exits a position when the price reaches a specified level, capping the trader's loss.

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

The 1% rule limits risk per trade to 1% of total account equity, preserving capital during losing streaks.

Question 3

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

Accepted Answer

You risk $1 to potentially make $3

Answer

A 1:3 risk-to-reward ratio means you risk $1 on a trade where the profit target is $3.

Question 4

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

Accepted Answer

The peak-to-trough decline in account value

Answer

Drawdown measures the decline from an account's peak value to its lowest point before recovering.

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

2% of a $10,000 account equals $200, which is the maximum risk per trade under this rule.

Day Trading Practice Test