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How to Manage Risk in the Stock Market
What is Risk Management?
Risk management is the process of measuring, or assessing risk and then developing strategies to manage the risk while attempting to maximize returns. Typically involves utilizing a variety of trading techniques, models and financial analyses.
The potential return from any investment is generally depending to the amount of risk the investor is willing to assume.
Investors will not take on greater risks without the possibility of higher earnings. This is called the risk premium.
Risk management is the process of measuring, or assessing risk and then developing strategies to manage the risk while attempting to maximize returns. Typically involves utilizing a variety of trading techniques, models and financial analyses.
The potential return from any investment is generally depending to the amount of risk the investor is willing to assume.
Investors will not take on greater risks without the possibility of higher earnings. This is called the risk premium.
Common types of Risk
There are two common risks that investors should notice them well:
Market Risk: The possibility that the value of financial markets rise or fall.
Inflation Risk: The risk that rising prices of goods and services over time, Inflation risk is also known as 'purchasing-power risk' and it is one of the most important factors for long-term investing.
You can't control the inflation risk, but with a good strategy you can manage and control the affect of market risk on your stocks.
A professional trader always tries to understand and control portfolio risk. Before entering into any trade, good traders first think about how much risk to take and how much risk exposure comes with a particular trade selection. Only then do they allow themselves to think about how much profit they stand to make.
Prudent investors always close their position and exposure if they determine that a portfolio carries too much risk.
There are two common risks that investors should notice them well:
Market Risk: The possibility that the value of financial markets rise or fall.
Inflation Risk: The risk that rising prices of goods and services over time, Inflation risk is also known as 'purchasing-power risk' and it is one of the most important factors for long-term investing.
You can't control the inflation risk, but with a good strategy you can manage and control the affect of market risk on your stocks.
A professional trader always tries to understand and control portfolio risk. Before entering into any trade, good traders first think about how much risk to take and how much risk exposure comes with a particular trade selection. Only then do they allow themselves to think about how much profit they stand to make.
Prudent investors always close their position and exposure if they determine that a portfolio carries too much risk.
Risk Management for a Trade
1- Before you decide to trade consider to these fundamental principles:
2- Before you trade a stock, know how much you are willing to lose.
3- Check the stock to be sufficiently liquid, can you buy or sell promptly?
4- Determine the cut-loss level before trading.
5- Determine your profit target (take-profit-level).
6- Buy the stock only at an acceptable price level. Use a limit order when you buy a stock.
7- Immediately after the trade has been confirmed, enter the stop-loss-at- market order at your predetermined stop-loss level.
8- Take profit when the trade reaches your profit target.
For example: so many traders determine their cut-loss level 2% of their capital and they call it 2% rule. If you own 1000 shares of X at $100 with a $2 stop loss order in place, your risk is: $2 * 1000 = $2,000. So long as you have capital amounting to at least $100,000 on hand, you would not be considered to be in breach of this "rule".
1- Before you decide to trade consider to these fundamental principles:
2- Before you trade a stock, know how much you are willing to lose.
3- Check the stock to be sufficiently liquid, can you buy or sell promptly?
4- Determine the cut-loss level before trading.
5- Determine your profit target (take-profit-level).
6- Buy the stock only at an acceptable price level. Use a limit order when you buy a stock.
7- Immediately after the trade has been confirmed, enter the stop-loss-at- market order at your predetermined stop-loss level.
8- Take profit when the trade reaches your profit target.
For example: so many traders determine their cut-loss level 2% of their capital and they call it 2% rule. If you own 1000 shares of X at $100 with a $2 stop loss order in place, your risk is: $2 * 1000 = $2,000. So long as you have capital amounting to at least $100,000 on hand, you would not be considered to be in breach of this "rule".
Portfolio Risk Management
Whit managing the risk of each trade your portfolio risk will be well under control and you manage your portfolio risk actively, but to control your portfolio risk management better notice to this pointes:
1- Determine your overall cut-loss level. Usually your portfolio should not lose more than 10% of your capital.
2- Diversify your investment in at least six or more different stocks.
3- Know your overall risk tolerance before building up the portfolio.
4- Act quickly when you see your risk limits exceeded.
5- Close out the entire portfolio if it loses to your overall stop-loss level.
Whit managing the risk of each trade your portfolio risk will be well under control and you manage your portfolio risk actively, but to control your portfolio risk management better notice to this pointes:
1- Determine your overall cut-loss level. Usually your portfolio should not lose more than 10% of your capital.
2- Diversify your investment in at least six or more different stocks.
3- Know your overall risk tolerance before building up the portfolio.
4- Act quickly when you see your risk limits exceeded.
5- Close out the entire portfolio if it loses to your overall stop-loss level.
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Seven Mistakes Traders Make
MISTAKE ONE
Lack of Knowledge and No Plan It amazes us that some people expect to trade the stock market successfully without any effort. Yet if they want to take up golf, for example, they will happily take some lessons or at least read a book before heading out onto the course. The stock market is not the place for the ill informed. But learning what you need is straightforward you just need someone to show you the way. The opposite extreme of this is those traders who spend their life looking for the Holy Grail of trading! Been there, done that! The truth is, there is no Holy Grail. But the good news is that you don't need it. Our trading system is highly successful, easy to learn and low risk.
MISTAKE TWO
Unrealistic Expectations Many novice traders expect to make a gazillion dollars by next Thursday. Or they start to write out their resignation letter before they have even placed their first trade! Now, don't get us wrong. The stock market can be a great way to replace your current income and for creating wealth but it does require time. Not a lot, but some. So don't tell your boss where to put his job, just yet! Other beginners think that trading can be 100% accurate all the time. Of course this is unrealistic. But the best thing is that with our methods you only need to get 50-60% of your trades "right" to be successful and highly profitable.
MISTAKE THREE
Listening to Others When traders first start out they often feel like they know nothing and that everyone else has the answers. So they listen to all the news reports and so called "experts" and get totally confused. And they take "tips" from their buddy, who got it from some cab driver we will show you how you can get to know everything you need to know and so never have to listen to anyone else, ever again!
MISTAKE FOUR
Getting in the Way By this we mean letting your ego or your emotions get in the way of doing what you know you need to do. When you first start to trade it is very difficult to control your emotions. Fear and greed can be overwhelming. Lack of discipline; lack of patience and over confidence are just some of the other problems that we all face. It is critical you understand how to control this side of trading. There is also one other key that almost no one seems to talk about. But more on this another time!
MISTAKE FIVE
Poor Money Management It never ceases to amaze us how many traders don't understand the critical nature of money management and the related area of risk management. This is a critical aspect of trading. If you don't get this right you not only won't be successful, you won't survive! Fortunately, it is not complex to address and the simple steps we can show you will ensure that you don't "blow up" and that you get to keep your profits.
MISTAKE SIX
Only Trading Market in One Direction Most new traders only learn how to trade a rising market. And very few traders know really good strategies for trading in a falling market. If you don't learn to trade "both" sides of the market, you are drastically limiting the number of trades you can take. And this limits the amount of money you can make. We can show you a simple strategy that allows you to profit when stocks fall.
MISTAKE SEVEN
Overtrading Most traders new to trading feel they have to be in the market all the time to make any real money. And they see trading opportunities when they're not even there. We can show you simple techniques that ensure you only "pull the trigger" when you should. And how trading less can actually make you more!
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Rules for Futures Traders
= Do not overtrade.
= Take a position only when you know where your profit goal is and where you are going to get out if the market goes against you.
= Trade with the trends, rather than trying to pick tops and bottoms.
= Don't just trade the volatile contracts.
= Calculate the risk/reward ratio before putting a trade on, then guard against the risk of holding it too long.
= Use technical signals (charts) to maintain discipline – the vast majority of traders are not emotionally equipped to stay disciplined without some technical tools. Use discipline to eliminate impulse trading.
= Trade with a plan – not with hope, greed, or fear. Plan where you will get in the market, plan how much you will risk on the trade, and plan where you will take your profits.
= Let profits run. Now to the "letting profits run" side of the equation. This is even harder because who knows when those profits will stop running? Trade all positions in futures on a performance basis. The position must give a profit by the end of the second day after the position is taken, or else get out.
= Don't trade on rumors. If you have, ask yourself this: "Over the long run, have I made money or lost money trading on rumors? O.K. then, stop it.
= Beware of all tips and inside information. Wait for the market's action to tell you if the information you've obtained is accurate, then take a position with the developing trend.
= Don't trade unless you're well financed...so that market action, not financial condition, dictates your entry and exit from the market. If you don't start with enough money, you may not be able to hang in there if the market temporarily turns against you.
= Be more careful if you're extra smart. Smart people very often put on a position a little too early. They see the potential for a price movement before it becomes actual. They become worn out or "tapped out," and aren't around when a big move finally gets under way. They were too busy trading to make money.
= Analyze your losses. Learn from your losses. They're expensive lessons; you paid for them. Most traders don't learn from their mistakes because they don't like to think about them.
= If you're just getting into the markets, be a small trader for at least a year, then analyze your good trades and your bad ones. You can really learn more from your bad ones.
= Always…. Always….. Always use stop loss.
= Take a position only when you know where your profit goal is and where you are going to get out if the market goes against you.
= Trade with the trends, rather than trying to pick tops and bottoms.
= Don't just trade the volatile contracts.
= Calculate the risk/reward ratio before putting a trade on, then guard against the risk of holding it too long.
= Use technical signals (charts) to maintain discipline – the vast majority of traders are not emotionally equipped to stay disciplined without some technical tools. Use discipline to eliminate impulse trading.
= Trade with a plan – not with hope, greed, or fear. Plan where you will get in the market, plan how much you will risk on the trade, and plan where you will take your profits.
= Let profits run. Now to the "letting profits run" side of the equation. This is even harder because who knows when those profits will stop running? Trade all positions in futures on a performance basis. The position must give a profit by the end of the second day after the position is taken, or else get out.
= Don't trade on rumors. If you have, ask yourself this: "Over the long run, have I made money or lost money trading on rumors? O.K. then, stop it.
= Beware of all tips and inside information. Wait for the market's action to tell you if the information you've obtained is accurate, then take a position with the developing trend.
= Don't trade unless you're well financed...so that market action, not financial condition, dictates your entry and exit from the market. If you don't start with enough money, you may not be able to hang in there if the market temporarily turns against you.
= Be more careful if you're extra smart. Smart people very often put on a position a little too early. They see the potential for a price movement before it becomes actual. They become worn out or "tapped out," and aren't around when a big move finally gets under way. They were too busy trading to make money.
= Analyze your losses. Learn from your losses. They're expensive lessons; you paid for them. Most traders don't learn from their mistakes because they don't like to think about them.
= If you're just getting into the markets, be a small trader for at least a year, then analyze your good trades and your bad ones. You can really learn more from your bad ones.
= Always…. Always….. Always use stop loss.
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