Common Risk Management Strategies for Traders

The term risk management in any context means the process of identifying, evaluating, and mitigating the identified issue. In the financial industry, it applies to identifying which stock or strategy can lead to loss, evaluating the loss percentage and whether it is bearable or should be mitigated; if mitigation is the way out, how?

The risk of losing money is always there in every trade. Even though your trades are successful, you still fear losing money. In this situation, proper risk management can help you cut down the losses. The question is how to manage the risk. Various risk management strategies in the market can help you manage the risk efficiently.

A good risk management strategy broadly covers a few points, such as determining your risk appetite, knowing the risk-to-reward ratio for every trade, and taking necessary actions against any long-term risk. There are various parameters using which you can define your risk and formulate the best suitable strategy. You may even use risk management software for stock market to help you determine the risk on your position.

Risk management strategies:

Many risk management strategies are available to traders; they may choose based on their trading needs and feasibility. Let us see some common strategies traders use to mitigate the risk.

1. Plan your trade: Ensure you have the right broker who gives perfect advice. If you are on your own, consider the below points while making a plan:

• Which instrument seems riskier and needs immediate attention?
• When to enter and exit the trade?
• Where to put the stop loss and take profits
• How to check for good trading opportunities?
• What action to take when the market is not performing as you expected?
• And most importantly, how can you stick to the plan made?

Among all these, the stop-loss and take-profit determine the key factor in planning your trade. When traders are well aware of what price they will pay and at what price they will sell and exit the trade, their trade can be considered successful as they can take necessary action in executing the trade.

1. Keeping in mind the 1% rule: This is the simplest strategy among all the risk management strategies. It suggests that traders should trade only 1% of their total capital. Suppose you have a total of Rs. 100; you will be trading only Rupee 1. This rule is very important while dealing with a highly volatile market. Some traders, out of greed or to take advantage of high volatility, put in a huge chunk of their capital and ultimately suffer a huge loss. To prevent this type of situation, it is suggested to invest only 1%. Even if you are making a loss on your position, the loss would be much less; you will still have the other 99% of funds to trade with and earn profit.
2. Keep your emotions away: Emotions play a vital role in determining the profit and loss of your trade. It is crucial to keep your emotions out while making any important decision. If you think logically, apply some proven trading strategies and do not let feelings take over, only then you can turn your trade into a successful one.
3. Make calculations of your expected return: Once you define the stop-loss and take profit points, the next thing you can do is calculate the expected returns on various trades. It will help you choose the most profitable one and will make your decision stronger, and you will have confidence in your trading abilities.

Use the below formula to calculate the expected return:

[(Probability of gain) X (%gain by take profit)] +

[(Probability of loss) X (%loss by stop loss)]

5. Diversifying and hedging your funds: Putting all apples in one basket may ruin all your apples if one goes south. In the same way, if you have invested all your money in just one asset or instrument, it may lead to huge losses. Thus, always diversify your capital in different instruments; you may choose different industries and geographic areas to diversify your portfolio.

There are even times when you are not sure of the results, and you want to protect your investment. In such a case, consider entering into the options contract in the opposite direction of your original trade. Make use of smart delta software to avail some help in deciding the options contract. This way, you can protect your position on either side.

With the above few risk management strategies explained, you will be able to reduce the risk and manage the portfolio more efficiently. You may consider only one strategy out of all, but it should cover most areas. Considering risk management before entering the stock market will make you responsible and serious towards your investments. If you want to get constant notifications and alerts about the instruments in your portfolio, then portfolio management software India can be an excellent choice

Kalpesh is a experience content writer having vast experience in writing articles of various fields like health, finance, education, textile etc.