The process of identifying, assessing, and controlling risks in trading. In prop trading, risk management is the primary determinant of success or failure.
Risk management in prop trading encompasses: position sizing (never risking more than 1-2% per trade), daily loss limits (stopping after a set number of losses), correlation management (not opening similar positions simultaneously), and emotional discipline (avoiding revenge trading and overtrading). Studies suggest that risk management skills account for 80%+ of the variance in prop firm success rates.