Risk management begins by identifying what can go wrong, how likely it is and how severe the consequences could be. It then applies controls such as position limits, decision thresholds, diversification, monitoring and stop conditions.
For an automated system, controls should be enforced independently of pressure to keep acting. A rule that blocks a trade when the estimated advantage is too small is one example of limiting exposure before a loss occurs.
Risk controls cannot remove uncertainty or make a strategy profitable. They need ongoing review because models, data, markets and operational dependencies can change.
ELI5
Risk management is planning how to limit damage when something goes wrong. It sets boundaries before a decision becomes urgent.
For example, a bot can refuse to trade unless the estimated advantage clears a minimum level. That rule limits unnecessary exposure, even though it cannot guarantee that accepted trades will win.
