Best Risk Management Techniques for Active Traders
Risk management is a major factor in trading. It is proper risk management that sets apart a profitable trader from over and over again loss making trader. Studying and following proper risk management techniques is crucial.
- Positioning the size of your trade is an important factor before commencing your trading activity.
- Calculate the number of shares to buy by dividing the capital with the risk, also known as the stop loss.
- Round it off to the nearest whole number which is the number of shares that you should buy.
Maintaining Stop loss
- When the trade does not go in your direction, Stop losses are kept.
- Stock prices are very volatile. It is possible to end up losing your whole capital in a single trade.
- Stop losses are a must on each and every trade.
Diversification of Investment
- It is not wise to invest the whole capital in a single stock. Diversification of portfolio is necessary as it is not possible practically to make profit on each and every trade.
- The chances of profiting from the market will increase if you spread your capital with a few loses and a few wins.
- Share prices tend to swing due to a number of reasons. Diversification saves you from any sudden loss that may happen overnight in a single stock.
Psychological factors that affect trading
The two main psychological factors that create an impact are fear and greed. Professional traders let their profits run and at the same time cut their losses as soon as possible. Failure of risk management is equal to gambling in stock market. In the long run, organized risk management is essential.