Risk management definition

Risk management is the process of identifying potential risks in your investment portfolio, and taking steps to mitigate accordingly.

Risk in investment is the possibility that an open position will fail to deliver the outcome you intended: this can result in limited returns, or losses larger than your initial outlay. For this reason, traders often take steps to analyse the inherent risks in their trades, and find ways of lessening their risk.

Ways of lowering risk

Once you have identified the potential risks in your portfolio, there are many different methods of lowering risk. Some of the more common examples include:

• Attaching stops and limits to automatically close out trades at specified levels
• Hedging, or opening an inverse position to one that you already hold
• Choosing trades that carry less risk
• Diversification, or spreading your trades into a broad range of asset classes