Trading is all about risks and managing those risks systematically. Risk is an inevitable part of every trade which cannot be eliminated completely; however, it can be minimized to a great extent. Therefore, this article has presented some of the best yet simplest strategies of risk management in online trading. These techniques have been tried and tested.
Therefore, risk management is an essential part of online trading that assists a person to cut down his losses. Additionally, it also helps to save a trader from going bankrupt by losing all his money. Risks often arise when traders continuously suffer losses, both minor and major. However, if these risks can be analytically analyzed and managed, online traders would be more than willing to open themselves in the online trading market.
Risk management is one of the most essential aspects of trading online. Ironically, it is one of the most overlooked aspects and hence a lot of traders often suffer a lot of losses. Besides, even if a trader has made substantial profits in trading can lose all of that with just a few bad trades without even knowing. Therefore, risk management strategy is, without a doubt, a prerequisite, for online trading.
So how does one learn the best techniques to restrict the risks of online trading? This article will help you learn some of the best and simple strategies that will help you not only protect your online trading profits but also to grow exponentially without risking much.
1. Plan Your Trades
Every battle is won before it's fought. This infamous military strategy is not only meant for wars, rather it implies that planning and strategy are of paramount importance for any venture. Successful online traders recommend planning the trade and trading the plan.
2. Reflect On The One-Percent Rule
A lot of seasoned traders follow the golden rule known as the one-percent rule. This rule of thumb states that a trader must never put more than one percent of his capital in a single trade. To demonstrate, consider the following example: if a trader has $10,000 in his trading account, his position (investment) in any given instrument should not be exceeding $100 in a single trade.
3. Efficiently Set Stop-Loss Points
Stop-loss points are basically the price (cost) at which a seller sells his stock and suffers a loss on his trade. This occurs often when a trade does not take place as the seller had expected. Stop-loss points are formulated to limit the ‘it will come back' mentality. Moving averages is the best way to set these points effectively. For instance, significant moving averages comprise of 5-, 9-, 50-, and 100-day averages. It is recommended to apply them to the stock's chart and draw comparisons based on past precedence.
4. Broaden and Enclose
It is important for a trader, online or conventional; to ensure that he never puts all his eggs in a single basket. Therefore, it is recommended to diversify or broaden the investments across the geographic region and across the industry sector as well. This reduces the risk factor thereby increasing opportunities for the trader. Likewise, a wise trader also knows when to fall back. Therefore, hedging or enclosing a trade position can save a trader from suffering severe losses.
5. Calculate Expected Returns
The significance of calculating expected returns in an online trade cannot be emphasized enough. This calculation is of utmost importance as it compels a trader to think thoroughly through their trading options and rationalize them analytically. Moreover, it is a systematic process for comparing various trades and opting for the ones with the most profit and least risks.
There is a formula for calculating expected returns: [(Probability of Gain) x (Take Profit % Gain)] + [(Probability of Loss) x (Stop-Loss % Loss)]
Choosing The Right Trading Strategy
Choosing the right trading strategy is an important part of risk management, but how do you choose it? We want to tell you what the best trading strategy is, but the simple answer is that there is no single answer. Different traders choose to use different strategies based on their investment size, experience, knowledge of the product, or personal preference. The important thing is to take the time to get to know the different trading strategies and then choose the one that best suits your needs.
5 Common Mistakes In Online Trading
Taking your first steps in the world of online trading can be difficult, and mistakes are part of learning inhibition. Here are some examples of common mistakes among novice traders.
Not planning ahead
We know you will be tempted to jump right in and start trading, but you should always stop and do the necessary calculations. Think before you act.
Initiating an improperly sized transaction
‘Insufficient' means either too large or too small. Opening a trade that is too large increases the risk of quickly depleting your trading capital and opening a trade that is too small can take a very long time to reach your goal.
Leverage is a great tool, but, as mentioned earlier, it carries risks and should be used with caution and with sufficient training.
There are many factors that affect the price of tradable commodities, and to understand them, traders should conduct proper research. You can easily get free information from news and market analysis. Do you not want to use it?
The Bottom Line
Online trading is all about knowing what to trade, when to trade, and how to trade. Traders must always come equipped with a strategy or plan when they embark upon trade or intend to leave it before its execution. Risk is an inevitable part of every trade which cannot be eliminated completely, however, it can be minimized to a great extent. Therefore, this article has presented some of the best yet simplest strategies of risk management in online trading. These techniques have been tried and tested. To sum it up, plan better and ahead of time by properly assessing your risks and minimizing them through risk management techniques.
You can also check out this guide on risk management.