TRADING MANAGING RISK

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Risk management helps traders to decrease losses. It can also help protect a trader's account from

losing the money. The risk happens when the trader suffers a loss. If it can be managed, the

trader can open him or herself up to making money in the market.

Risk Management Techniques

Planning Your Trades

Successful traders commonly quote the phrase: "Plan the trade and trade the plan." Planning

ahead can often mean the difference among success and failure.

Stop-loss and take-profit points

 

Stop-loss (S/L) and take-profit (T/P) points represent two key ways in which traders can plan ahead while trading.

Successful traders know what price they are willing to pay and at what price they are willing to sell. They can then

measure the resulting returns against the probability of the stock hitting their goals. If the adjusted return is high

enough, they execute the trade.

 

Conversely, unsuccessful traders often enter a trade without having any idea of the points at which they will sell at a

profit or a loss. Emotions begin to take over and manage the trades. Losses often provoke people to hold on and

hope to make their money back, while profits can entice traders to foolishly hold on for even more gains.

A lot of traders follow

what's called the

one-percent rule. This

rule suggests that you

should never put more

than 1% of your capital

or your trading account

into a single trade. So if

you have $10,000 in

your trading account,

your position in any

given instrument

shouldn't be more

than $250.

Consider the

One-Percent Rule

A stop-loss point is a

price at which a trader

will sell a stock and take

a loss on the trade. This

often happens when a

trade does not move

out of the way a trader

hoped. The points are

designed to prevent the

"it will come back"

mentality and limit

losses before they

escalate.

Stop-Loss &

Take-Profit Points

Setting stop-loss &

take-profit points are

often done using

technical analysis, but

the fundamental

analysis can also play an

important role in timing.

The efficiency of Set

Stop-Loss Points

Moving averages design

the most popular way to

set these points, as they

are easy to calculate

and widely tracked by

the market. Another

great way to place

stop-loss or take-profit

levels is on support or

resistance trends. These

can be formed by

connecting previous

highs or lows that

occurred on significant,

above-average volume.

Important Points

The importance of calculating Expected Return

The importance of this calculation cannot be emphasized, as it forces traders to think through

their trades and rationalize them. As well, it gives them a systematic way to compare various trades

and select only the most profitable ones.

Diversification and Hedging

Not only does this help you manage your risk, but it also opens you up to more opportunities.

You may also find yourself a time when you need to hedge your position.

When setting these points, here are some key considerations:

 

 

Use longer-term moving averages

 

Adjust the moving averages to match target price ranges.

 

Stop losses should not be closer than 1.5-times the current volatility

 

Adjust the stop loss according to the market's volatility

 

Use known fundamental events such as earnings releases

Past performance is not necessarily indicative of future results. All investments carry risk and all investment decisions of an

individual remain the responsibility of that individual. There is no guarantee that systems, indicators, or signals will result in

profits or that they will not result in losses. All investors are advised to fully understand all risks associated with any kind of

investing they choose to do. Hypothetical or simulated performance is not indicative of future results.


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