Risk Management Flashcards
6 cards from real Day Trading practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Risk Management flashcards as text
What is a 'trailing stop' and how does it differ from a fixed stop-loss?
Answer: A trailing stop moves with price to lock in profits; a fixed stop stays at the original level
A trailing stop adjusts upward as price rises, locking in gains, while a fixed stop-loss remains at its original price.
Which trading scenario demonstrates proper risk management?
Answer: Limiting each trade's risk to a fixed percentage of account equity
Limiting risk to a fixed percentage per trade preserves capital and prevents account blow-ups from a string of losses.
What does 'overtrading' refer to in day trading?
Answer: Executing too many trades, often driven by emotion rather than strategy
Overtrading occurs when a trader takes excessive trades, often emotionally driven, leading to increased costs and poor decision-making.
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:
Answer: 4% loss
At 4:1 leverage, a 1% adverse price move results in a 4% loss on the trader's actual capital.
What is the purpose of a 'daily loss limit' for day traders?
Answer: To automatically stop trading after losses exceed a preset threshold
A daily loss limit halts trading once cumulative losses hit a set amount, preventing emotional revenge trading.
Why is correlating risk across multiple open positions important in day trading?
Answer: It prevents overexposure when multiple positions move in the same direction
Correlated positions can amplify losses simultaneously, so managing combined risk prevents unexpected large drawdowns.