Top 5 Risk Management Rules Every Trader Must Follow
Risk management is the foundation of successful trading. These five rules keep you in the game.
Risk management
A demand from your broker to add funds when losses have reduced your margin below the required level, failing which positions are squared off.
A margin call is what happens when a leveraged position has lost enough that the money in your account no longer covers the exchange's margin requirement. The broker asks you to add funds by a deadline, and if you do not, it closes some or all of your positions at the market price, whatever that is. Suppose you hold an SBI futures lot with ₹1,00,000 margin and the stock falls sharply, producing a ₹40,000 mark-to-market loss overnight. If the required margin is still ₹1,00,000, you must deposit ₹40,000 or be squared off, often at a poor price near the open. Margin calls tend to arrive in the worst conditions, when everyone else is also being forced to sell. They are a direct consequence of position sizing that was too large for the volatility. Trade small enough that a bad day does not trigger one.
Risk management is the foundation of successful trading. These five rules keep you in the game.
VideoMargin is the money your broker blocks before it lets you trade. How much depends on whether you buy for delivery, trade intraday or take a futures or options position.
VideoLeverage makes a position bigger than your cash. The spread is the gap between the buy and sell price. One multiplies your results, the other quietly charges you on every trade.