Beginners Guide on Risk Management in Brief

Risk Management has always been crucial part of trading. Successful trading is not only dependent on right prediction of the trend but management of risk is major decisive factor. Risk Management is a must strategy for successful long term trading career. In the absence of a good risk management skills many good traders have fallen down several time. Risk management may not be the topic of interest for novice trader because it does not secure the return but restricts the loss. But exiting market by avoiding loss is also gain. Novice trader are always in search for holy grail factor which will always give them gains on every trade they enter into. They focus on maximization of profit rather than minimization of loss. In the expectation of high profit they take higher risk, way out of their risk appetite. Their emotion guide them to emptying their trading capital resulted by continuous loss. Researches says that after 8 trades there is the major chances of 3 continuous loss, after 16 trade there is chances of 4 continuous loss and after 32 trade there is chance of 5 continuous loss. So risk management is as important as market analysis and placing a right trade. A series of right trade may turn into a wrong trade as a bundle without a good risk managing strategy.

The trader should enter into the trade with being mentally, emotionally and economically aware on the chances of loss. Trader should not ignore the possibility of loss. The market is mechanized in a way that most of the trader loose and only some win. Trading overall is negative sum game, winner wins less than that the looser loose because of several factor such as brokerage, taxes and other fees. Experts says even a very successful trader has a hit rate of 60% to 70%. This simply means successful trader also lose 30% to 40% to trade. But the question is how they are so successful even after losing 40% of trades, the answer for this in simple, they are successful risk manager. They limit their risk size. This makes their loss smaller. The series of larger gain and smaller loss finally leads towards successful trading. Walking five steps forward and 3 steps backward finally leads a person to two steps forward. This is secret mantra of successful trading. We cannot expect to move five steps forward only. Stepping 5 steps upward may lead trader to fall into abyss.    

Risk management starts before trading. At first certain amount should be set aside as trading capital out of disposable income or savings. No trader should start with undecided capital. Starting without deciding exact amount of trading capital may lead into injection of higher percentage of wealth into trading. Loss of which may lead into loss of higher portion of wealth. No trader should start trading with loan amount. Loss of which may lead into bankruptcy. If a trader enter with a trading capital of Rs 100,000 then it can be from his savings or he may gradually plan to increase his trading capital to such amount by contributing from his disposable income monthly. The capital may be dynamic. Upon the gain trader may increase capital. Next thing on risk management includes trading limits. The trader should not trade total trading capital in a single trade. Diversification of fund is must. There is common practice throughout the world that at most 10%-15% of trading capital should be invested in single trade i.e. if the trading capital of any trade is Rs 100,000 then the trader can invest at most Rs 15,000 in one trade. Risk taking is another things that involves in risk management. A trader should not risk more than 2% of his trading capital in a single trade. Commonly expert suggest 1% risk on capital but if the trader is confident on his trade and his indicator is giving positive indication then he can take 2% risk at most.

To sum up the points, risk management is must use tool for all the trading career. The trader should start with deciding trading capital and risk tolerance. Risk tolerance may differ from one to another person. It is affected by income of the trader, investment objective, investment experience and many other factors. Trader should constantly try to enrich themselves from knowledge. Knowledge and information is the greatest power in the field of trading. You can fetch more and more capital from your knowledge.  

Happy Trading!!

Rajiv Bhandari

31-12-2020

 

Published on:

1.       www.investopaper.com on 01-01-2021

              Link: Risk Management In Trading: Why It Is As Important As Maximizing Returns?

2.       www.sharesansar.com on 01-03-2021

             Link: Beginner's Guide to Risk Management - How can I Maximize Gains and Minimize Losses?