Investors follow some risk management processes that ultimately lead to a good risk/ reward ratio to keep losses under control when trading in shares and equities says Peter DeCaprio. Although risk management might be for beginners only, it is equally applicable for seasoned and experienced investors who frequent trading. Managing risks or losses allows traders to keep up with their trading goals to keep themselves open for availing the opportunity of gaining from their investment. The share market is quite unpredictable.
Despite making hefty profits, investors may see it wiped away in a sudden burst, and the only protection is available from proper risk management. Only by following adequate risk management strategies is it possible to prevent massive erosion of investment and keep the interest alive for gaining in the future, explains Peter DeCaprio.
Here are some strategies that can protect your investment by minimizing losses.
Investors must follow a plan when trading in the stock market and avoid all emotions that can sway their decisions and make them deviate from the plan. Sticking to the trading plan is of utmost importance because successful trading that gives the correct results depends on the proper execution of the plan. Planning before you start trading makes the difference between success and failure.
Start your plan by focusing on two key aspects – the first is Stop Loss (S/L), and the other is Take Profit (T/P). Be clear about the price at which you want to buy and the price you want to sell. It becomes easy to have an idea about the returns vis. a vis. The chance of the stock meeting their expectations confirms Peter DeCaprio. You can take a call about executing the trade if the adjusted return is high enough. Not having a plan can spell disaster as your approach in trading is more like gambling.
How to set stop loss and take profit
A stop-loss is a point at which you are ready to sell the stock. Despite incurring losses if the trade does not happen in the way you hoped. The approach helps to limit losses instead of waiting too long in the hope that things would look up.
Take profit is a pre-determined price point that you accept as the selling price of some shares. Despite the profit not being too high as you know that trying for additional profit could be risky. Think about a scenario when a stock is approaching a resistance level after climbing high. When you want to sell it before consolidation sets in.
Diversify and hedge
Avoid big losses by creating a diversified portfolio comprising stocks from varied sectors and assets. Because focusing on just one or two sectors can result in huge losses. Spread your investments across geographical locations, industry sectors, and market capitalization. Besides managing risks, you could see more opportunities coming.
Hedging your position is another way to mitigate risks. Look at the stock position when the results are due. And by taking the opposite position with the help of options. You can manage to protect your position.