Risk management in trading is important for lowering the danger of suffering heavy losses due to stock market trading. As Kavan Choksi Finance Expert mentions, risk management in the stock market typically involves discovering, assessing, and mitigating risks. These risks often crop up when the market deviates from expectations.
Kavan Choksi Finance Expert underlines a few risk management techniques that can be useful for active traders
Risk management aids in cutting down losses, and is important to protecting the traders’ accounts from losing all of their money. This risk takes place when traders suffer losses. If the risks can be appropriately managed, traders shall open themselves up to making money in the market. This is a vital prerequisite to successful active trading. Here are certain risk management techniques that active traders may follow:
- Plan the trades: Planning ahead can commonly mean the difference between success and failure in stock market trading. Stop-loss (S/L) and take-profit (T/P) points represent two important ways that can help traders to plan ahead. Successful traders know exactly the price they are willing to pay, as well as the price at which they are willing to sell. They subsequently can measure the resulting returns against the probability of the stock hitting its goals. These traders execute the trade if the adjusted return is high enough.
- Consider the one-percent rule: Many traders today follow the one-percent rule. This rule of thumb suggests that a trader must not put more than 1% of their capital or trading account into a single trade. Basically if one has $10,000 in their trading account, their position in any given instrument must not be more than $100.
- Set stop-loss and take-profit points: A stop loss point implies to the price at which a trader tends to sell a stock and take a loss on the trade. Such a situation generally arises if a trade does not pan out the way the trader had expected. The points are designed to limit losses before they escalate. For instance, in case a stock breaks below an important support level, traders shall sell as soon as possible. Conversely, a take-profit point is the price at which a trader would sell off a stock and subsequently take a profit on the trade. This happens when the additional upside is fairly limited, considering the risk. For instance, if a stock is approaching an important resistance level subsequent to a large move upward, traders may want to sell before a period of consolidation takes place.
As Kavan Choksi Finance Expert says, in addition to considering the techniques discussed above, traders should also avoid putting all their eggs in one basket. Traders need to diversify their investments, across sectors, market capitalization and geographic regions. This can not only help manage risk, but may also open up more opportunities for a trader. Stock market traders should also consider hedging their position. When trading activity subsides, they can effectively unwind the hedge. If a trader is approved for options trading, then buying a downside put option or a protective put, can also be used as a hedge to stem losses from a trade that turns sour.