Risk management, also known as money management, refers to a series of transaction technologies used to reduce risk. Due to various factors, the fluctuation of exchange rate may be very large from time to time, so it is an important part of trading strategy to protect your funds from the adverse effects of price fluctuation.

The core idea of money management is to avoid any single transaction exceeding 1-2% of human capital. This principle can greatly reduce the risk: only 1% of the initial margin is in danger, even after several failed transactions, you are likely to retain most of the account balance.

The risk-reward ratio is the ratio of potential profit to loss in a given transaction. For example, when you take a $ 100 risk position and earn $ 300 profit, the risk-reward ratio is 1: 3.

A ratio of 1: 2 is considered to be the most basic goal, which means that only a third of the funds will need to be profitable to ensure no loss.

The potential profit and loss can be determined by the stop-loss and take-profit levels.

Stop-loss and take -profit orders are closed when the price reaches certain predetermined level. Stop loss or take profit levels can be identified by various technical analysis tools:

Support and resistance: A short position stop-loss is usually placed above the resistance level, while a long position stop -loss is often set below the support level.

Trend lines and channels: Stop loss prices are usually placed outside the channel, either above or below the trend line.

Let's say you open a buy order of EURUSD at 1.12097. In order to achieve a 1: 2 risk-reward ratio, a stop-loss level can be set at 1.12077 (2 points) and a take-profit at 1.12137 (4 points). Therefore, you only need to take the risk of a loss of $ 20 to make a profit of $ 40. Depending on your initial margin, you can even further set the SL / TP level, as long as your risk capital is less than 1-2% of your personal funds.

Please note that the price of each point depends on the trading instrument and the size of your position. You can find the point value, spreads and conditions for every 1 standard lot on the page or easily calculate here.
Trailing stop can be used to automatically adjust the stop-loss level when the price fluctuates towards a favourable direction. As risks decrease, it is also possible to eventually lock in the profits that have been made.

But keep in mind that neither stop loss nor take profit guarantees profitability: when the market is volatile or there is a price gap, your order may be executed at a different price than expected.

You can learn more about related events and indicators that affect market volatility here.