One subject
Risk management
28 lessons, 78 glossary terms and 7 market guides cover this across the academy. Each one links to its own page, and nothing is repeated here.
Trading involves risk. You could lose more than your deposit.
The curriculum
28 lessons cover this.
In curriculum order, which is the order you would meet them.
- What your orders do not protect you fromModule 02The trade ticket8 min
- What a margin call isModule 03Margin and account mechanics7 min
- What a stop out isModule 03Margin and account mechanics7 min
- What leverage isModule 03Margin and account mechanics9 min
- Offered leverage and effective leverageModule 03Margin and account mechanics8 min
- Why a loss is harder to recover than it was to makeModule 03Margin and account mechanics8 min
- Worked scenario: a single position reaches close outModule 03Margin and account mechanics10 min
- The Sunday to Thursday working weekModule 06When the market moves7 min
- What ATR isModule 07Reading the chart7 min
- How to read the economic calendarModule 08Macro and the calendar14 min
- Volatility around events is a risk topic firstModule 08Macro and the calendar8 min
- What risk management actually isModule 09Risk, plan and practice7 min
- What risk per trade describesModule 09Risk, plan and practice10 min
- How position size follows from stop distanceModule 09Risk, plan and practice10 min
- Volatility adjusted position sizingModule 09Risk, plan and practice8 min
- What portfolio heat isModule 09Risk, plan and practice7 min
- Daily and weekly loss limitsModule 09Risk, plan and practice7 min
- What reward to risk describesModule 09Risk, plan and practice8 min
- What expectancy describesModule 09Risk, plan and practice7 min
- Volatility based stop placementModule 09Risk, plan and practice11 min
- Adding to a losing position, as a risk topicModule 09Risk, plan and practice8 min
- What goes in a trading planModule 09Risk, plan and practice10 min
- How a trading system is testedModule 09Risk, plan and practice9 min
- The limits of testing on historyModule 09Risk, plan and practice8 min
- How a trading journal is keptModule 09Risk, plan and practice8 min
- The behavioural failure modesModule 09Risk, plan and practice14 min
- What a proprietary trading firm arrangement isModule 10Staying safe and your rights10 min
- What going live responsibly meansModule 10Staying safe and your rights8 min
The glossary
78 terms belong here.
Alphabetical, each defined in one sentence on its own page.
- Average entry priceAverage entry price is the size weighted mean of the prices at which the parts of one position were opened, and it moves every time a further tranche is added at a different price.
- Average true range (ATR)A measure of how far an instrument typically travels in one period, averaging the true range of recent bars so that gaps between them are counted rather than ignored.
- Averaging downAveraging down is adding to a position that has already moved against its opening price, which lowers the average entry of a long position and increases the total exposure in the same action.
- BacktestingRunning a fixed set of trading rules over stored historical prices to record what that rule would have produced, which measures the rule against one past sample and nothing else.
- BetaA measure of how far an asset's returns have moved with a benchmark's returns over a past window, where a beta of one describes an asset that moved with the benchmark on average.
- Black swan eventAn event outside the range past data suggested was possible, carrying an extreme market impact, and rationalised convincingly only after it has happened, from the argument set out by Nassim Nicholas Taleb.
- Break even pointA break even point is the price at which a position's gain exactly covers the cost of opening and closing it, so the position finishes level rather than ahead.
- Circuit breakerA circuit breaker is a rule that halts trading once a price has moved beyond a stated threshold, imposed by a venue on every participant at once and lifted on a published schedule.
- CompoundingCompounding is the effect of applying a percentage change to a base that has already been changed, so a sequence of gains and losses does not net out to the sum of its percentages.
- CorrectionA correction is a fall that interrupts a rising market without ending it, conventionally cited once the decline from a recent high reaches about a tenth of its value.
- CorrelationCorrelation measures how closely the returns of two markets have moved together over a chosen window, on a scale from perfectly opposite through unrelated to perfectly aligned.
- DeltaThe rate at which an option's price changes for a small change in the price of the underlying, quoted as a number between minus one and one.
- DiversificationSpreading exposure across positions whose results do not move together, so that the variability of the whole is lower than the average variability of its parts.
- DrawdownThe fall from a peak in an account's value to the lowest point reached before a new peak is set, usually stated as a percentage of that peak.
- ExpectancyExpectancy is the average result per trade a set of rules produced over a sample of closed trades, combining how often it won with how much it won and lost.
- ExposureExposure is the money value of the market a position covers, measured on the full contract value rather than on the sum posted as margin against it.
- FakeoutA move that breaks a watched price level convincingly enough to look like a breakout, then reverses back through it, leaving the level intact and the break unconfirmed.
- Flash crashA very fast and very deep price fall followed by a partial recovery within minutes, produced by liquidity withdrawing faster than orders arrive rather than by news about the asset.
- Flat positionA state in which an account carries no open exposure to an instrument, so nothing revalues on a tick, no collateral is held against it and no unrealised result is running.
- Free marginThe part of an account's equity that is not currently held as collateral against open positions, and therefore the buffer standing between the account and a close out.
- GammaGamma measures how quickly an option's delta changes as the price of the underlying moves, so it describes the curvature of the option's value rather than its slope.
- Gearing ratioGearing ratio relates a contract's full value to the margin held against it: losses are calculated on that full value and are not limited to the amount deposited.
- Guaranteed stopGuaranteed stop is an industry term for a stop the offering broker undertakes to fill at exactly the stated level, including through a gap, usually for a premium.
- HedgingHolding a second position whose result moves opposite to an existing exposure, so part of the first position's variation is offset while both remain open.
- Historical volatilityA measure of how much a price actually moved over a past window, calculated as the standard deviation of its returns and usually restated as an annual percentage.
- Implied volatilityImplied volatility is the volatility figure that, fed into an option pricing model, returns the option's traded price, so it states what the market is charging today for movement that has not happened yet.
- In the moneyAn option is in the money when exercising it immediately would produce a positive amount: a call whose strike sits below the current price of the underlying, or a put whose strike sits above it.
- Initial marginInitial margin is the amount set aside from an account when a position opens, calculated as a percentage of the contract's full value and held, not spent, for as long as the position stays open.
- Intrinsic valueIntrinsic value is the part of an option's premium that would survive if all remaining time to expiry vanished, equal to the amount by which the option is in the money and never less than zero.
- Inverse ETFAn inverse ETF is a listed fund built with derivatives to return the opposite of its benchmark over one stated period, almost always a single day, and its return over longer stretches is not the mirror of the benchmark's.
- Investment gradeInvestment grade is the band of credit ratings covering borrowers an agency judges least likely to default, running from the top rating down to BBB minus or its equivalent, with everything below it classed as high yield.
- Kelly criterionThe Kelly criterion is a formula that returns the fraction of capital to stake on a repeated bet, given a win probability and a fixed reward to risk ratio.
- LeverageUnder leverage, profit and loss are calculated on a contract's full value while only a percentage of that value is posted as margin, so a loss is not limited to the amount deposited.
- Leveraged ETFA leveraged ETF is a listed fund built with derivatives to return a stated multiple of its benchmark's move over a single day, applied to a fall exactly as to a rise.
- Long positionA long position gains as the price of the instrument rises and loses as it falls, and where the contract is calculated on full value the loss is not limited to the amount deposited.
- Loss aversionLoss aversion is the finding that a loss of a given size registers more strongly than a gain of the same size, which is the account usually offered for holding adverse positions and closing favourable ones early.
- Loss limitA loss limit is a threshold fixed in advance, stated as an amount or as a percentage of the account, at which a trading plan calls for dealing to stop for a defined period.
- MarginMargin is collateral held while a position stays open, not a payment for it: losses are calculated on the full contract value and are not limited to the amount deposited.
- Margin callA margin call is a notification that account equity has fallen close to the collateral open positions require, and it is a warning rather than the automatic closing that can follow.
- Margin close-outMargin close-out is the automatic closing of open positions by the firm once account equity falls to a stated proportion of the margin those positions require.
- Margin requirementA margin requirement is the percentage of a contract's full value that has to be posted and held while the contract is open, set per instrument by the counterparty.
- Market riskMarket risk is the exposure to loss from prices moving, the one risk that remains after credit, liquidity and operational risks have been separated out.
- Market sentimentMarket sentiment describes the prevailing disposition of participants towards an instrument or a market, inferred from surveys, positioning data and price behaviour rather than measured directly.
- MartingaleA martingale is a staking scheme in which the size is doubled after every loss so that one win recovers the whole sequence, and it requires unlimited capital and no ceiling on the stake to work.
- Money managementMoney management is the set of conventions traders use to decide position size and how much of an account is exposed at once, separate from any view about direction.
- Negative balance protectionNegative balance protection limits a retail account's liability to the funds held in it, so a deficit left after a gapping close out is written off rather than owed.
- Net positionA net position is what remains in one instrument once long and short size have been offset against each other, stated as a single direction and a single quantity.
- Out of sample testingOut of sample testing holds back part of a price record while a rule is being shaped, then runs the finished rule over the held back part, so the result is measured on data the rule never saw.
- Out of the moneyAn option is out of the money when exercising it at the current price would be worth nothing, which leaves its intrinsic value at zero and its whole premium as time value.
- OverfittingOverfitting is shaping a rule until it describes the particular record it was developed on, including the parts of that record produced by chance, which is why the result does not survive new data.
- Overnight positionAn overnight position is any position still open when the trading day rolls at the provider's cut off, which is the moment financing is applied and the settlement date moves forward.
- OvertradingOvertrading is dealing more often or in larger size than a method calls for, which multiplies transaction costs against a set of positions the method never asked to be taken.
- Portfolio heatPortfolio heat totals the amount at risk across every open position at once, measured as what each would lose at its own stop and expressed as a share of account equity.
- Position sizingPosition sizing decides how many units a position covers, most often by working back from the distance to its protective level and the amount of equity being put at risk.
- Position tradingPosition trading holds one view for weeks or months, so financing and the size of the eventual move matter far more to the result than entry timing or the spread paid.
- Put optionA put option gives its buyer the right, but not the obligation, to sell an underlying asset at a stated price by a stated date, in return for a premium.
- PyramidingPyramiding adds to a position that is already showing a gain, so the holding grows in stages while its average entry price moves towards the current market price.
- Quantitative tradingQuantitative trading derives its entry, exit and sizing rules from statistical work on historical data, so the decision comes from a tested rule set rather than a discretionary reading.
- RebalancingRebalancing returns a portfolio or an index to its intended weights by trimming what has grown past them and adding to what has fallen below, either on a fixed calendar or once a drift threshold is crossed.
- Revenge tradingRevenge trading is opening a position immediately after a loss in order to recover it, usually in larger size than the sizing rule permits and frequently in the instrument that produced the loss.
- Reward-to-risk ratioA reward-to-risk ratio compares the distance from an entry price to a target with the distance from that entry to a protective level, stating the first as a multiple of the second.
- Risk managementRisk management is the set of arrangements that determine how much can be lost on one position and across an account, covering size, protective levels, exposure to related instruments and the capital committed in total.
- Sharpe ratioThe Sharpe ratio divides a return earned above the risk free rate by the volatility of that return, so two results can be compared by how much variability each one carried to get there.
- Short squeezeA short squeeze is a sharp rise driven by short sellers closing, where each purchase made to close a short adds to the buying and pushes the price further against those still short.
- SpeculationSpeculation is taking market risk deliberately in pursuit of a gain from a change in price, as distinct from hedging, which takes a position to offset a risk already carried.
- Standard deviationStandard deviation measures how far a set of values sits from its own mean on average, expressed in the same units as the values themselves, which is why it can be added to and subtracted from a price.
- Stop distanceStop distance is the gap between the entry price and the level at which a position is set to close against itself, measured in the instrument's own increment rather than in money.
- Stop loss orderA stop loss order rests at a level away from the market and becomes an instruction to close the position once that level is reached, so the loss is capped at the fill obtained rather than at the level itself.
- Survivorship biasSurvivorship bias is the distortion introduced when only the cases that lasted are available to examine, so a sample assembled from what remains describes the survivors rather than the population.
- Swing tradingSwing trading holds positions for days to weeks to capture one move inside a larger trend, which brings overnight financing, weekend gaps and scheduled events into the arithmetic that intraday styles avoid.
- Systematic tradingSystematic trading follows rules fixed in advance for entry, size and exit, so the same market data produces the same decisions whoever is watching the screen and however they feel about it.
- Trading planA trading plan sets out in advance, in writing, which markets a trader deals in, how positions are sized, what defines an entry and an exit, and how results are reviewed.
- Trailing stopA trailing stop follows the market at a set distance while a position moves in its favour and holds still when the market turns back, so its level ratchets one way only.
- UndervaluedUndervalued describes a market whose price sits below an estimate of what it is worth, where that estimate is the output of a valuation method rather than anything observable on a screen.
- Used marginUsed margin is the total collateral currently held against open positions, the portion of an account's equity that is committed to what is already open rather than available to support anything new.
- VegaVega measures how much an option's price changes when the volatility implied by the market rises or falls by one percentage point, with everything else about the option held still.
- VolatilityVolatility measures how widely a price has moved around its own average over a period, counting moves in both directions equally and saying nothing about which way the next one goes.
- Volatility indexA volatility index states how much movement the options market is pricing into an underlying market over a fixed forward window, conventionally the next thirty days, expressed as an annualised percentage.
The market guides
7 guides answer a question about it.
Standalone reference answers, entered laterally rather than worked through.
- The volatility index and what it measuresMarketsWhat a volatility index is computed from, how to read its units, and why it is not a mirror of equities.
- Sector groups and how they moveMarketsHow the standard classification works, which sectors share sensitivities, and where it stops describing.
- Leveraged and inverse ETFsMarketsHow a daily objective is built, and why the daily reset can leave a longer result worse than the index.
- Gapping and weekend riskMechanicsWhy a market reopens away from where it closed, and what happens to orders sitting inside the jump.
- Stop orders, and what they do not guaranteeMechanicsThe four things a stop order is believed to promise, and which of them it actually delivers.
- Margin requirements by marketMechanicsWhat margin is, why the requirement differs by market, and when a published requirement can change.
- Margin close out explainedMechanicsThe sequence from a falling margin level to a closed position, and what the warning threshold does not do.
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MetaTrader 5
