| Updated: September 15, 2025Social trading and risk management
This lesson covers the following
- What is risk management?
- The importance of risk management in social trading
- Final words
Risk management in social Forex trading is another important factor that will contribute to your overall profits. In many cases, money management and risk management are two sides of the same coin, which means that both are equally important if you want to be successful. However, while money management tells you how much you can invest, risk management tells you whether you should invest at all. It will help you understand when it is a good idea to enter a trade and whether it is wise to follow a particular trader.
What is risk management?
Just like money management, the definition is contained in the name. Risk management is a set of rules you devise that help you determine whether a situation is too risky. If you have good risk management habits, you will never enter trades with a high risk factor, which means that you will further cut your losses. Good risk management is at the heart of responsible trading.
However, risk management doesn’t necessarily require you to avoid taking chances. It does require you to know when a trade is too risky for your style or strategy, though. Even if you’re the high-risk, high-reward type of trader, there are some trades you shouldn’t enter because they might not fit your style, or simply because the chances of winning are too small and, even if you do win, the profit is not worth the risk. At the end of the day, this is what risk management is all about – finding out if the potential profit is worth the risk. Some traders lose a large percentage of their trades, but the ones they win are enough to compensate for the losses. That being said, to pull something like this off you need to be really experienced. Make sure you don’t trade recklessly and that the risks you take are worth it.
Risk management is a process. First you need to evaluate the risk and then decide what stance to take. Will you take action or not? Is the potential profit worth the risk? Those are the kinds of questions you will have to constantly ask yourself. Bad risk management can easily lead to financial ruin. Good risk management can help you stay in the game for a long time.
The importance of risk management in social trading
There is no way to stress this enough – whether you like big risks or not, risk management is crucial. Risk management helps you evaluate the trades you’re undertaking in relation to the potential profit. No matter what your strategy is, you should always know the risk.
Unlike money management, risk management is much harder to define because it’s much more subjective. What one trader might deem risky, another might find adequate, and even favourable. For example, some copy traders don’t think that investing more than 50% of their entire portfolio at one time (but in different traders) is risky. In our opinion, though, this can lead to significant losses while the potential for profit is not that great, which means that it’s not worth the risk. There is nothing wrong with investing in five traders at the same time, or even more, but we think that allocating 50% of your portfolio is too much. Some traders might argue that this is not the case, which is why we said that the whole problem is rather subjective.
Still, you should always carefully weigh the risks before you take action. This is how good risk management works. Sometimes the risks are low – there are trends that clearly show the direction of the price movement, so it’s almost safe to assume that the prediction we’re making is correct. However, there are times when it’s rather unclear what’s going to happen. We need to be aware of those times and simply stay put without taking action. Don’t invest money just because you’re bored or because you want to see what will happen (if that’s the case, you can use your demo account).
There are a few things you can do to mitigate risks. The first thing is to diversify your portfolio. Don’t invest too much in the same thing. Try different trades, study different fields. This way you improve your chances of success. At the end of the day, though, nothing in trading is certain. This means that whatever you do, you will have to take risks. Trading is not for everyone. You need to be able to quickly evaluate situations and take risks. If you’re too scared of failing, you can’t be a trader. Everyone fails at one time or another. The important part is to keep profits above losses.
Final words
Proper money and risk management are essential for anyone who considers themselves a serious trader. The path to success runs through discipline. If you’re not disciplined, you will probably fail. However, if you manage to develop good habits, you’re one step closer to becoming an extraordinary investor.