Risk Management In Trading
Risk management in trading is an underrated topic, and nobody will talk about this because maximum people would not apply it.
All people would think it is boring and their profits would drop, which will not be beneficial.
A successful day trader requires knowledge, skill, and experience.
90 % of traders fail in the stock market; only 10 % become successful day traders and survive.
Successful 10 % of members will follow their own rules strictly based on risk management and strategy.
They were full-time traders.
Trading is all about,
- risk management
In this article, I will talk about risk management strategies.
What Is Riskmanagement? Risk Management In Trading
In simple way risk management means managing your loses and profits to become a successful trader.
Even though you have a profitable trading strategy, that makes money.
If you do not have proper risk management, that strategy doesn’t matter, and your trading account will blow up.
I will explain risk management in trading with an example.
If a person X has a 1 lakh trading account balance.
A person Y has a 1 lakh trading account balance.
Person X will risk his capital up to 50 percent (i.e., 50000) on every trade because he was expecting huge money, and he had trust in his strategy
Person Y will risk his money up to 2 percent (i.e., 2000) on every trade because he is a steady and perfect person, and his approach will be the same as person X
They will get up to TEN transactions for the strategy starting from the morning on the trading day.
The sequence would be L, L, P, P, L, P, L, L, P, P
According to person X risk management, he will lose his entire capital at the first two trades because he is risking his money up to 50 percent (i.e., 50000), and the first two trades were in loss.
According to person Y risk management, he will not lose any penny because he is risking only 2 percent of his capital (i.e., 2000), and the profit and loss trades were equal.
X person has been aggressive, and he was not able to manage his risk.
On being steady and perfect, Y person is safe.
People will start day trading with the dreams of becoming rich overnight
It is rare.
It is much safer to adopt a trading strategy that will make your account grow slower and steady.
Intraday trading is one of the fastest ways to grow your account when we apply our strategy correctly.
Most of the people do not trade properly.
A successful day trader will make a 200 percent return in a year.
The strategy suggested in our course will have positive expectancy will it is appropriately executed.
A successful trader will learn about risk management, not only strategies.
Find low-risk entries with high potential rewards.
The minimum risk-reward ratio would be 1:2.
For example, if you buy 1000 rupees worth of stock, your target should be 1200, and your stop loss should be 900.
If the price comes to 900 rupees, you must accept the 100 rupees loss and exit the trade.
Using a 1:2 risk-reward ratio, you will make money even if you are wrong 40% of the time.
As a day trader, your job is not the buying and selling the stock but to manage your risk and your account.
How will you do risk management in trading?
There are a few steps in risk management in trading and accounts.
The first step risk management in trading is,
Always Choose The Right Stock. (Risk Management In Trading)
Risk management starts from using the correct stock; although you can master your strategy as a pro, you are trading the wrong scrip, you will lose money.
Know About Your Position Size. (Risk management In Trading)
How many shares you want to trade will depend on your account size
How much money you need to earn will depend on your daily target.
Multiply your daily target with 100.
That will be your account size for day trading.
For example, your daily target is 5000, then multiply with 100.
You will need capital up to 5 lakhs.
Another step for risk management is to determine your risk for the trade.
you have to calculate your risk one day before the trading day.
.You would never risk more than 2% of your account on any given trade.
If your trading account has 1 lakh rupees, you should never put more than 2000 rupees on a trade.
Determine Your Trade Size (Risk Management In Trading)
How to estimate the maximum risk for share means to keep the strategy stop-loss.
For example, if your trading account has 1 lakh rupees, your risk capital would be 2000 rupees.
Your strategy risk is 1 rupee, then you can trade 2000 shares.
If you do not have possible cash in your account to buy 2000 shares, if the stock price is more than 50 rupees, you have 1 lakh rupees in your trading account, you have to buy less number of shares.
Because you can always make riskless, or you shouldn’t take risk more than 2% of your trading account.
It needs practice for the risk management in trading.
I always recommend paper trade for at least two months in a live account.
Your maximum number of trades would not be more than 10.
Your risk would not be more than 2% of the risk in your trading account per trade.
Day trading requires making a quick decision and a disciplined approach.
You will be a successful day trader if you follow risk management strategies and manage your position size.
It is not the strategy that makes you successful, but the knowledge of technique and discipline to follow the rules and risk management strategies makes you a successful day trader.
My favorite quote from warren buffet,
You Can”t Make Baby In One Month By Getting Nine Women Pregnant.
I may confidently say that if you follow the above rules, you can get the most accurate trade..
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