Risk management is an essential part of trading that can help you protect against losses. That makes a proper risk management strategy a very crucial part of any trading plan. Here are some strategies that you can use to better manage your trades.
Plan of Action
You should never forego the planning stage. As the old cliché goes, if you fail to plan, you plan to fail.
To do this, you have to make sure that you have the right broker for your trading style. Different brokers have different offerings. And not all of them offer what you need for a successful trade.
The next step is to know the prices at which you are willing to pay and the prices at which you are willing lock in profits.
Many unsuccessful traders trade without any idea when they will enter or exit the trade. As a result, they play things by ear and end up confusing trading with gambling.
The 1% Rule
Many day traders follow the one-percent rule, which suggests that you should never put more than 1% of your capital into a single trade.
This technique is popular among traders that have accounts of less than $100,000. Many traders with higher balances in their account may opt for lower percentages.
Using Stop Loss and Take Profit Orders
The stop loss level is the price at which you are going to sell an asset and take a loss on the trade. Obviously, you need this when the trade doesn’t go as you planned.
The order is created to prevent the attitude where you wait for the trade to turn around and come back. You are effectively limiting your losses before they mount up.
On the flipside, the take profit level is the price at which you will sell a stock and take profit on the trade. You can use this when the upside potential is limited because of the risks.
Diversification and Hedging
You also have to make sure that you’re not putting all your eggs in one basket. Because if you invest all your money into one stock or instrument, you may expect to lose all your investments at once.
Always diversify your investments across sectors, industries, market caps, and regions. This helps you manage your risks as well as provide you some vision on better and more profitable opportunities.
You also need to learn about hedging your position. Check the stock position when the results are up. If you think there’s a substantial amount of risk, take the opposite position through the use of options.
This can help you protect your position. When the trading activity slows down, you can then remove the hedge.
If you can do options trading, you may also consider downside put options, which is also known as protective put. You can use this technique to minimize the losses whenever the trade turns sour.
A put options offers you the right but not the obligation to sell the underlying asset at a particular price on or before the option’s expiration.