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Trade risk
The planned loss on one position if its invalidation is reached.
Lesson · Trading Risk Management
Account Risk and Risk Budget
Allocate risk across individual trades, open positions, daily limits, and weekly limits without exceeding the account risk budget.
Core concepts
What to understand
Keep the process direct: define the risk, calculate it, and enforce the limit.
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Open risk
The sum of the planned losses to every active stop. Correlation, Concentration, and Portfolio Exposure adds the adjustment for positions that share a driver; here they simply add.
3
Loss limits
Daily and weekly limits stop new risk after a defined amount of damage.
Interactive lab
Change the risk conditions
Adjust the controls and read the market behavior and account impact after each change.
Account Risk and Risk Budget Lab
Synthetic educational data · no live market connection
RISK MODEL
Risk process
Apply it in order
Risk calculations should happen before the order is submitted.
Start with account equity
Risk limits should be based on current usable equity, not an old peak balance.
Reserve the budget
Subtract realized loss and open risk before adding another position.
Reduce shared exposure
Correlated positions can consume more budget than their count suggests.
Knowledge check
Check your understanding
Select one answer for each question. Feedback appears immediately.
1. What does open risk measure?
Open risk estimates the loss if active positions reach their planned invalidations.
2. You used the full daily risk budget. What is the direct action?
The purpose of a limit is to prevent additional exposure after the budget is consumed.
3. Why can three trades exceed the intended budget?
Each planned loss contributes to total account risk.
4. Daily limit $1,000. Realized loss so far $300, open risk to current stops $400. The next setup needs a $350 planned loss. Does it fit?
$1,000 − $300 realized − $400 open = $300 available. A $350 planned loss does not fit; reduce its size until the full planned loss is $300 or less, or pass.
Practical rules
- Set trade, open, daily, and weekly limits separately.
- Count realized losses and active stop risk together.
- Leave reserve for slippage and gaps.
Common mistakes
- Treating available buying power as risk budget.
- Ignoring exposure already open.
- Resetting the daily limit after one winning trade.
References
Official reading
The labs use simplified synthetic examples. These sources cover the underlying risk and execution concepts.
CME Group · The 2% Rule
Example of defining a fixed account-risk limit per trade.
FINRA · Know Your Risk Tolerance
Risk capacity and willingness are personal constraints.