Risk management is important for cutting down losses. It can be helpful in protecting the traders’ accounts from losing all of their money. As Kavan Choksi mentions, risk occurs when traders suffer losses. If risks are managed in a systematic manner, traders can open themselves up to making money in the market. Risk management is a prerequisite to successful active trading. After all, traders who have generated significant profits can end up losing it all in just one or two bad trades without a proper risk management strategy
Kavan Choksi sheds light on certain risk management strategies that can be helpful for active traders
Trading can be quite exciting and profitable, as long as one is able to stay focused and keep emotions at bay. Traders must incorporate risk management practices to prevent losses from getting out of control. Traders must have a strategic approach to cut losses through stop orders, profit taking, and other risk management strategies to stay in the game. Planning ahead can often mean the difference between success and failure.
Stop-loss (S/L) and take-profit (T/P) points represent two major ways in which traders can effectively plan ahead when trading. Traders must orderly determine what price they are willing to pay, and at what price they are willing to sell. Subsequent to doing so, they can measure the resulting returns against the probability of the stock hitting its goals. They can execute the trade if the adjusted return is high enough.
Unsuccessful traders commonly enter a trade without having any proper idea of the points at which they will sell at a loss or profit. Much like a gambler on an unlucky or lucky streak, emotions often start to over and dictate the trades of inexperienced or unsuccessful traders.
A lot of traders tend to follow the one-percent rule for risk management. This rule of thumb basically suggests that one must not put more than 1% of their capital or trading account into a single trade. Hence, if one has $10,000 in their trading account, their position in any given instrument should not be more than $100. Such a strategy tends to be common for traders who have accounts of less than $100,000. Some tend to go as high as 2% if they can afford it. A lot of traders whose accounts have greater balances might opt to go with a lower percentage. This happens due to the fact that the position of the trader also increases, as the size of the account increases. The ideal way to keep the losses in check is to keep the rule below 2%. Going beyond this can risk a considerable sum of money in the trading account.
As per Kavan Choksi, a stop-loss point is the price at which a trader shall sell a stock and take a loss on the trade. This commonly happens in situations when a trade does not pan out the manner in which a trader hoped. These points are designed to prevent the “it will come back” mentality as well as limit losses prior to they can escalate. For instance, in case a stock breaks below a key support level, traders commonly sell as soon as possible.
