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Follow risk management rules for better returns

Follow risk management rules for better returns
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Is trading so difficult that it can't be mastered? The answer to this is an affirmative no. Trading in stock market is not a rocket science and it...

Is trading so difficult that it can't be mastered? The answer to this is an affirmative no. Trading in stock market is not a rocket science and it can definitely be learnt. One can be a consistent profitable trader.

Very often, we have heard someone or the other, saying that they have lost huge amount in stock market and it is better to refrain from investing in stock market as it is a gamble.

Some people make huge losses in stock market because they don't follow the principle of risk management. Risk management calls for putting a strict stop loss, positioning your size and exiting from the stock at right levels. In the initial days when we are new to trading, every individual goes through a phase of loss if we do it without knowledge. One should trade with a proper back tested strategy, adequate knowledge of proper risk management and tuning yourself to right psychology. Success in trading depends not on how you trade but on how you manage risk.

Market cannot be controlled but you can control your risk in every trade.If we take care of our risk first, profit will automatically follow. Ultimate goal of a trader should be to preserve capital.

The whole secret to trading in stock market lies in losing minimum amount when we take a wrong trade and preserving trading capital because without capital you can never trade. Be equipped with proper back-tested strategy, take high probability trades, setup strict stop loss and risk no more than 1 per cent of your capital and maintain a risk reward ratio of 1:2. Never add more units or number of shares to your losing grade and if you are wrong just be out of the

trade. Have a daily limit on your loss to the extent of 2 per cent of your trading capital. Don't get into revenge trading in case of a loss.

You don't need a strategy with 90 per cent to 95 per cent-win rate to be successful in trading. A good strategy with 50 per cent to 60 per cent-win rate is enough to make big money in trading. In this case risk reward ratio is 1 :3. Win rate is not everything in trading. It is risk reward which determines success.

A strategy with 60 per cent to 70 per cent- win rate can also have a losing streak on a small sample size of 10 trades but in higher sample size of hundred, it is predictable and consistent provided you have a statistical edge.

(The author is a homemaker who dabbles in stock market investments in free time)

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