Risk management in trading

28 Mei 2022

When trading on the stock exchange, you need to know at least the basics of risk management, but it is better to understand it professionally, because the main attribute of any transactions made in the financial markets is risk. Without competent, professional management, without risk management, it is impossible to stay in such markets for a long time. To be a successful trader, you must learn to assess risks, balance and reduce them. Only in this case, the capital will not only be saved, but also increased.[/I]

Fundamentals of risk management

To properly manage capital, you need to know about the following principles:

1. You should not invest even in the most tempting project more than half of the total capital.

Among financial experts, this principle is also called "don't put your eggs in one basket" or "diversification." That is, in order to successfully continue your activities in the financial market, it is best not to invest all your funds in only one undertaking. More than half of the money must be left for other projects and for the continuation of their work

2. Invest in one position no more than 10-15% of the total amount of funds you have.

Another advice from the category of diversification, which insures against ruin. He warns that one cannot invest a lot of one's funds at once, it is better to distribute them correctly and limit one's risks, and make the profit more stable.

3. The rate of risk in the transaction must not exceed 5% of the total amount of funds you have.

If you follow this principle, then the loss ratio of any trader will be less than 5% of the total capital. Depending on which market and which strategy is used to trade, the percentage of risk can be reduced to 1%.

4. There must be a balance between diversification and concentration.

While diversification is one of the most reliable risk management techniques for reducing risk, even its application must be measured. It is necessary to balance the diversification and concentration of funds. There is no need to turn your portfolio into a "stuffing" of investment instruments, you will only need to open positions in 5-7 groups of instruments. Before compiling a portfolio, it is necessary to determine the correlation between trading instruments. It may be zero, but it is preferred that it be negative. In this case, the future fall of one group of instruments will be compensated by the growth of other groups.

5. Place stop orders.

In order to avoid large losses if the price change is not in your favor, it is best to take care in advance and set Stop Loss. It makes the price fixed, which will allow the trader to close the position at this price. The way the Stop Loss will be set is influenced by market analysis, as well as the personal readiness and ability of the trader to make dangerous, risky, but profitable transactions.

When placing a Stop Loss, you need to correctly assess not only the totality of technical factors, but also the characteristics of personal qualities, in particular, your ability to take risks.

6. Determine the rate of return.

For any operation in the market, it is necessary to determine what the ratio of profit and loss will be. Such a forecast is necessary so that, in the event of undesirable phenomena on the market, the risks are balanced.

In the financial world, a good ratio is 3:1.

The simplest example: if a trader risks $100, then his profit from the transaction must be at least $300 (300:100 is the same as 3:1). If for some reason such a ratio cannot be achieved, then it is better to refuse the deal.