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Risk assessment definition
Risk assessment is the process of identifying and measuring how much you could lose on a trade before you open it. It puts a figure on the downside so you can decide whether the trade is worth taking.
A risk assessment weighs position size, stop-loss distance, leverage, margin requirement, market volatility, liquidity, and the risk-reward ratio. Together these show the worst-case loss and whether it fits your account size and trading plan. You run the assessment before committing, so the numbers, not the trade idea, set the size.
Risk assessment is the measuring step, not the controlling step. Risk management is the wider process of running an account within those limits, and risk mitigation is the set of actions that reduce a measured risk, such as a stop-loss or a smaller position. Assessment tells you how big the risk is; the other two decide what to do about it.
Risk assessment Example
You have a USD 10,000 account and decide to risk 1% on a single trade.
The maximum loss you will accept is:
USD 10,000 √ó 1% = USD 100
Before you enter, you set the stop-loss distance and position size so a stop-out costs no more than USD 100. If the only workable size would risk more than USD 100, the assessment tells you to trade smaller or skip the trade.
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