How many of you have made big losses in trading? Well, we all know the answer. ????
Everyone makes mistakes and everyone losses big in initial day of trading career, as we are not aware of importance of RISK MANAGEMENT.
Do you know the most common response to tell anyone that you trade in the stock market?
It is very risky, stay away from it. Or Stock trading is gambling. Isn’t it?
And let me tell you – Trading is risky. Be it is stocks, futures, commodities, or any other instrument. But it is risky not because of the market. It is because of the trader.
No matter how good you trader are and how excellent your trading strategy is, if you cannot manage your RISK well, you will end up busting your account Sooner or later. This is harsh but verifiable fact.
If you want to success in stock market trading, you need to learn the most important skill for that – Risk management.
Why Risk management is important?
Risk management is a key factor in becoming and continuing to be a successful trader, no matter which market you are trading in and how much money you are staking. With trading, losses are inevitably going to happen sometimes; so, managing risk and minimizing these losses is vital.
If you want to minimize your losses as much as possible, then it is crucial to have a good risk-management strategy working for you. Otherwise, you could quickly become one of the many beginners that walk away from trading after initial setback.
Managing your risks in trading will keep you afloat where others have failed. Setting a good trading plan without risking more than a small percentage of your capital sets up a firm foundation.
The objective of risk management is to ensure that capital is used wisely, and profits are made, whilst minimizing any losses.
How to manage RISK?
How many times it has happened that you saw a perfect trade set-up and took a trade. For some time trade went in your favor and then boom – it reversed the whole moves?
In above situation, newbie trader might come out with loss, professional trade has risk management system in place to take maximum out of market while keeping downside in control.
So let’s discuss step by step process to manage RISK well:
1) Use proper stoploss
“If you are entering in a trade without exit plan in case the trades goes against you, you are far from becoming a good trader.”
A stop loss is a tool which allows you to protect your trades from unexpected market movements by letting you set a predefined price at which your trade will automatically close. Therefore, if you enter a position in the market in the hope the price will increase, and it actually decreases, when the price hits your stop loss, the trade will close in order to prevent further losses.
Be disciplined and respect Stoploss. There’s no point having a safety net in place if you aren’t going to use it properly.
2) Set account RISK limits
One of the fundamental rules of risk management in trading is that you should never risk more than you can afford to lose.
Some times we get caught in random market movements and face series of losses. In a hope to cover the loss of previous trade, we trade big position in next trade and loss again and this never self-sabotage stops until we blow our account.
So how to avoid this self-sabotage?
Put limit on RISK
Assume you have 1,00,000 ₹ in your account.
Risk only 1-2% per trade (i.e. 1000₹ -2000₹)
Stop trading for day if you lose 4% of capital (i.e. 4000₹) that day
Stop trading for a week if you lose 10% of capital (i.e. 10,000 ₹) in that week
Hard stop from trading if you lose 30% of capital (i.e. 30,000₹) in a month.
If you have capital than you can show up next day and continue. Without capital a trader is of no use. So, our top most priority should be to preserve our capital. This Account Risk limit will help us in this process.
3) Have a proper trading plan
One of the big mistakes new traders make is signing into a trading platform and then making a trade based on nothing but instinct, or maybe something that they heard in the news that day.
While this may lead to a few lucky trades, that is all they are – luck. To properly manage your risk, you need a trading plan that outlines at least the following:
When you will open a trade
When you will close it
Your minimum reward-to-risk ratio
The percentage of your account you are willing to risk per trade
Once you have made your trading plan, stick to it in all situations. A trading plan will help you keep your emotions under control while trading and will also prevent you from over trading. With a plan, your entry and exit strategies are clearly defined and you will know when to take your gains or cut your losses without becoming fearful or feeling greedy. This approach will bring discipline into your trading, which is essential for good risk management.
If you are a beginner trader, then no matter who you are, the best tip to reduce your risk is to start conservatively.