Lingo topic · 47 terms
Risk management
Stops, ratios and position sizing: staying in the game.
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- CorrelationHow closely two prices move together, measured from −1 (always opposite) through 0 (unrelated) to +1 (always together).
- Credit RiskThe risk that a borrower or trading partner fails to pay what it owes.
- Currency ExposureHow much you stand to gain or lose from moves in a particular currency.
- Currency HedgingUsing trades such as forwards or options to protect against losses from exchange-rate moves.
- Currency RiskThe chance of losing money because exchange rates move against you.
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- Margin callA warning, or forced action, from your broker when your losses leave too little money in your account to support your open trades.
- Mark-to-MarketValuing a position at today's market price instead of the price you paid, so your account shows what it is really worth right now.
- Market RiskThe risk of losing money simply because prices move against you.
- Money ManagementThe rules for how much of your account you put on each trade, so a bad run can't wipe you out.
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- Payoff RatioYour average winning trade divided by your average losing trade.
- Political RiskThe chance that elections, policy changes, unrest or conflict will hit a market or an investment.
- Position SizingWorking out how big each trade should be so that, if your stop is hit, you lose only what you planned to.
- Profit FactorTotal money won on winning trades divided by total money lost on losing trades.
- Profit/LossHow much money a trade or account has made or lost, either still open (unrealized) or closed (realized).
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- RiskThe chance of losing money, or of a result turning out worse than you expected.
- Risk CapitalMoney you can afford to lose completely without hurting your life, the only money that should go into speculative trading.
- Risk ManagementThe habits and rules that limit how much you can lose, so you can stay in the game long enough to get good.
- Risk ParityA portfolio approach that spreads risk, not money, evenly across asset classes.
- Risk-reward ratioHow much you risk on a trade compared with how much you aim to make, such as risking 30 pips to make 60 (1:2).
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- Settlement RiskThe danger that you deliver your side of a trade but the other party fails to deliver theirs.
- Sharpe RatioA score of how much return an investment earned for each unit of risk (volatility) it took.
- Sortino RatioA variation of the Sharpe ratio that only counts downside swings as risk.
- Standard DeviationA statistical measure of how spread out values are from their average; in trading, a common gauge of volatility.
- Stop-lossAn order that automatically closes your trade at a set price to cap how much you can lose.
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- Take-profitAn order that automatically closes your trade at a set price to lock in a profit.
- Trading planYour written rulebook: what you trade, when you enter and exit, and how much you risk, decided before the pressure hits.
- Trailing StopA stop-loss that automatically follows price as a trade moves in your favour, locking in profit while giving the trade room to run.
- Transaction RiskThe risk that exchange rates move between agreeing a deal in a foreign currency and actually paying or receiving the money.
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