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 the primary purpose of a stop-loss order in day trading?
Answer: To limit the maximum loss on a trade
A stop-loss order automatically exits a position when the price reaches a specified level, capping the trader's loss.
The '1% rule' in day trading risk management states that a trader should risk no more than:
Answer: 1% of total account equity per trade
The 1% rule limits risk per trade to 1% of total account equity, preserving capital during losing streaks.
What does a risk-to-reward ratio of 1:3 mean?
Answer: You risk $1 to potentially make $3
A 1:3 risk-to-reward ratio means you risk $1 on a trade where the profit target is $3.
Which of the following best describes 'drawdown' in day trading?
Answer: The peak-to-trough decline in account value
Drawdown measures the decline from an account's peak value to its lowest point before recovering.
A trader has a $10,000 account and uses the 2% risk rule. What is the maximum dollar amount they should risk per trade?
Answer: $200
2% of a $10,000 account equals $200, which is the maximum risk per trade under this rule.
What is 'position sizing' in the context of day trading risk management?
Answer: Determining how many shares to buy based on risk tolerance
Position sizing determines the number of shares to trade so that the dollar risk aligns with the trader's risk limit.