Learn how to manage risk in the stock market with our logical guide to risk management. Discover valuable tips and strategies to minimize risk and earn consistent profits. Read now on MoneyWiseMind
The stock market is an interesting place that attracts many traders and investors looking to make big profits. However, the reality is that the majority of people lose money in the stock market despite its potential for stunning profits. This makes it clear that there is a significant amount of risk involved in stock market trading and investing. If you want to consistently earn profits from the market, you need to have the knowledge to manage risk. In this post, we will discuss some valuable tips to help beginners and retail traders and investors manage risk technically to minimize risks and earn profits consistently.
Let's begin with the tips:
1. Make a Perfect Trading Plan
A trading plan is a set of rules or guidelines that define your trade. It is essential to develop a proper trading plan before entering the market. Having a perfect trading plan can help you trade with peace of mind without any stress, enabling you to make the right decisions on when to take entry, where to keep stop loss, and when to exit the trade. These are all components of a trading plan. If you jump into the market without a perfect trading plan, you will blow up your capital within no time.
2. Stick to your Trading System.
A trading system consists of a set of rules that help you make the right decisions at the right time. It will help you avoid taking any impulsive decisions before a trade. It is essential to have a proper trading strategy as soon as you enter the market with real cash and think deeply about your approach to the market. You should backtest and research your trading strategy in different market conditions. You should backtest your strategy with at least 100 trades to test consistency in different markets. Sticking to one strategy rather than jumping from one strategy to another is essential to generate consistent returns over time.
3. Keep a Strict Stop Loss.
When you initiate a trade, you don't know what the result will be. Nothing is in your control whether it will be a winner or a loser. Only one thing is in your control, and that is the stop loss. A stop loss is a predetermined price level that is placed to minimize or limit losses in case the trade goes against you. On the other hand, when the trade moves in your favour, you should ride the profits, keeping a trailing stop loss. Always maintain a stop loss in such a way that your trade can get some rooms to breathe, not so tightly that it gets stopped out from the noise of the market despite your correct analysis. To keep your stop loss, you should keep it at a level where it will invalidate your trading setup. For example, if you're trading on chart patterns, then your stop loss should be at a level where your chart patterns get destroyed. If you're trading on the basis of support and resistance, then you should keep your stop loss at a level where if the price reaches it, your S/R is broken.
4. Maintain a Proper Position Size
It is crucial to determine the appropriate position size while trading. It is unwise to put all your eggs in a single basket. It is advisable to manage your position size in such a way that the amount you lose if your trade gets stopped out does not have a significant impact on your capital. For instance, if you want to take a risk of Rs.1000 with a portfolio capital of Rs.100,000 and your stop-loss is Rs.20, then the actual quantity with which you can trade would be 50.
So, 1000 / 20 = 50 is the actual quantity with which you can trade.
There are other ways also to calculate the position size
5. No Revenge Trade
As trading is a tough mental game, so there are lot of emotions involved in it. You should never try to recover your past losses. Many traders fall into the trap of doing wrong trading to recover what they have lost in stock market overnight. In doing so they take random trades with the hope that the trades will go in their favour. But, market turns 180 degree from their thought and go against them. Thus they end up with huge losses. This is called revenge trading. Most of the time retailers do this mistake, trying to recover small losses, but fail.
It happens like this;
6. Maintain a Trading Journal
Some people think that maintaining a trading journal is a waste of time, but we think trading journal can help you to identify the mistakes and shortcoming in your trade. Once in a week on regular basis if you evaluate this journal, it will help you to improve your trading skill.
Conclusion: Risk is a vast subject. It varies from person to person according to their personalities, risk appetite. There is no 'One Size Fits All' approach. Fix out what suits your needs, based on your personality, portfolio size, age, your goal etc. then implement your plan accordingly. So, if you manage your risk in a perfect way you will be a successful trader in future.
If you have any other thoughts on this kindly comment in the comment section.
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