The topic of trading is relevant for all readers who are interested in the stock market. Specialists are well aware of the need for professional risk management when making any financial transactions. However, not all beginners know about this. If you do not follow the rules of risk management in trading, briefly lose the trading account or some part of it. Let's try to do without highly specialized terms that are simply unfamiliar to many, making up the definition.
What is it?
Risk management in trading in some way resembles an airbag in a car. The only difference is that it is intended to preserve capital, not life.
That is why it is so important to know the rules of risk management in trading and be able to apply them in practice. This is especially true for beginners who have not yet comprehended all the features of the functioning of the stock market.
Where to begin?
The first thing a future professional trader should learn is to trade at zero. Simply put, he should at least not lose money by making transactions. Only after that it is worth learning to earn. Almost no one can avoid this stage. Some traders already in the first months of their activities begin to earn income. However, at the same time they miss the stage at which the realization that they have to work in an aggressive environment comes.
There is a risk of quickly recollecting yourself as an expert. However, no one is immune from sudden and painful falls in the stock market. For the same reason, do not despair, not receiving income immediately. If you believe the statistics, then almost half of the transactions can bring a negative result. That is why it is so important to apply risk management in trading.
Basic Rules
Let's list them briefly and then discuss in more detail:
- Do not invest more than half of the capital.
- Observe the risk standard.
- Keep a balance between diversification and concentration.
- Set stop orders.
- Determine the rate of return.
- Open multiple positions.
Do not invest more than half of the capital
If you want to carry out successful activities in the financial market, try not to invest all funds exclusively in one project. Try to leave most of the capital for other transactions.
Moreover, some experts in the stock market recommend using no more than thirty percent of capital to participate in the transaction. The lower the number, the better.
Try to distribute capital between several projects, thus insuring yourself against the potential risk of ruin.
Follow the risk standard
According to experts, this indicator should be no more than five percent of your capital. Observing this principle, you will achieve that the loss ratio will be no more than 5 percent of capital. This indicator does not even exceed the inflation rate. Depending on the area of investment, the risk level may be reduced to one and a half percent. This is one of the basic rules of risk management in trading, which helps prevent a possible loss of capital.
Keep a balance between diversification and concentration
The ability to distribute funds between several projects is called diversification. Using this risk management strategy in trading, the calculation is made to reduce the likely losses. Concentration is the concentration of an impressive portion of capital in one market or in one project. This is why it is important to strike a balance between diversification and concentration. Experts recommend using an average of no more than ten investment instruments. This allows you to distribute the funds in such a way that when one group falls, the losses are compensated by the growth of the others.
Set Stop Orders
To avoid significant losses when prices change, pre-set the so-called stop loss. This will fix the price, thus allowing the trader to close the position. However, before using a stop order, it is advisable to perform a market analysis. However, the readiness of the trader to a certain risk is no less important.
Determine the rate of return
For any, even potential, transactions in the stock market, experts recommend determining the ratio of the rate of profit and loss. This forecast allows you to balance risks. If the desired ratio cannot be achieved, it is recommended to completely abandon the use of this method of investment.
This is an important risk management tool in trading. How to draw up a rate of return, each participant in the stock market decides independently. It depends not only on the characteristics of the activity, but also on the character of the participant himself. Some are more willing to take risks and are not afraid to make deals in the outcome of which they are not sure.
Open multiple positions
If several positions are available on the stock market, provided that an identical instrument is used in each of them, the trader must pre-distinguish trading and trending ones. The former are intended for short-term trading. The second are designed for a long period.
How to protect capital?
When making transactions in the stock market, a trader should pay special attention to protection from participation in transactions that do not generate income. To this end, even professional players are trained in money management.
The basic rule comes down to not risking impressive amounts. In each transaction, you should try to use the minimum part of your capital. The smaller the transaction amount, the less risk.
How to create your own strategy?
People who have long been developing in the stock market know that there are no universal solutions. Each player independently builds his own strategy, guided by acquired knowledge and practical skills.
Beginners, as a rule, try to get as much information as possible, using available sources. They read news and professional articles, visit forums and ask experts questions. Based on the information received - make their own conclusion regarding the appropriateness of buying or selling.
This method really allows you to collect a lot of information, but due to the lack of practical experience it can lead to unsuccessful actions.
In addition to theoretical knowledge, you need to own real strategies. In practice, traders rarely wait longer than a month to observe the circumstances. Money must constantly rotate and be profitable. A buy-and-hold strategy is only relevant in very profitable markets. However, you must be able to accurately determine the moment for the most profitable sale of securities.
Key Strategies
Investors know several of the most popular ways to conduct transactions:
- Scalping. It involves a large number of small transactions that bring the trader a low, but almost guaranteed profit. The main disadvantage is that untimely interruption of transactions reduces the investor's profit. Another drawback is that an impressive negative deal can nullify the positive effects of everyone else.
- Intraday trading. The transaction in this case is completed within one day. The main disadvantage is that you need to make positive transactions daily. This creates psychological pressure, which as a result becomes the reason for making the wrong decisions.
- Positional trading is considered one of the most popular. It is this option that selects a significant number of players.
As you understand, it is especially important to comply with the rules of risk management in trading for beginners. This is due to the fact that it is the beginners who are the ones who commit the most errors. That is why, at the beginning of their professional activities, they should not rely on profit, but on the ability to maintain capital and avoid losses. To this end, one should study books on risk management in trading and other available sources.