Which factor is crucial for establishing effective risk management?

Determining appropriate stop-loss levels based on market volatility is crucial for effective risk management because it provides a systematic approach to limiting potential losses. Setting stop-loss levels ensures that traders can exit a position before their losses become unmanageable, protecting their capital and maintaining a sustainable trading strategy. This practice takes into account the market's inherent fluctuations, helping to mitigate the effects of sudden adverse movements.

Being aware of market volatility allows traders to place stops at strategic levels that reflect the current conditions, rather than static levels that may not account for changing dynamics. By incorporating volatility into position management, traders can adjust their risk exposure in a more informed manner, ultimately leading to better decision-making. This proactive stance helps foster long-term success in trading by minimizing the emotional stress associated with market ups and downs.

In contrast, while understanding market psychology and diversifying can have their benefits, they do not directly address the immediate management of risk through concrete actions like stop-loss placements. Trading based solely on intuition lacks the structured approach necessary for systematic risk management, which can lead to greater exposure to unpredictable market behavior.