Risk Management in Stock Market Trading

 

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·         Risk is present in every business and proper Risk management is a Road to Success for every business Risk free trade does not exist theoretically of practically Risk is associated with reward It is essential to manage risk to protect ones capital Risk management is very essential for trading as markets have potential to take back all life time profits in just few bad trades Risk management helps in preserving initial capital and accumulated profits so that one can stay alive long enough in financial markets for wealth creation.

 

The main components of risk management

1.      Stop loss

2.      Analyze REWARD RISK Ratio

3.      Trail stop loss

4.      Booking Profit

5.      Use of stop loss

 

1.      Stop Loss: integral part of risk management it is an order placed to buy/sell a security once it reaches a certain price it is designed to limit the amount of loss To limit the amount of loss which can increase beyond imagination!

2.  Analyze RISK REWARD ration: before initiating trade one should analyze RISK REWARD ratio, on conservative basis if the Ratio is 1:5 one should not attempt to trade

3.    Trail Stop Loss: Stop loss placed to protect ones capital but once the trade is in profit stop loss should be moved. That the trade is at zero risk even if trailed stop loss gets triggered.

4.     Booking Profit: Profit is the only goal for which we all trade m but same time profit will be our wealth only when it is realized otherwise it is just a Notional Profit. Hence one should book profit at pre defined target levels and one should not be carried away by ones emotions specially greed when prices are near to predefined target levels. 

5.      Use of stop loss: A trader should always put stop loss and trade a fraction of his capital. It is very important for the trader to have sound knowledge in the area concerned. One should be comfortable with the trading system. He should be aware that it is possible and inequitable to have a losing streak of five losses in a row it is called DRADOWN. This awareness will help the traders to prepare as to how to control Risk and choose their Trading system.