Trading is 10% on strategies and 90% on discipline. Be it investing, trading or even taking any decision in life calculation and management of risk associated with it is very essential. Every day we get a lot of inquiries from many traders having years of experience and knowledge but still making loss consistently. This happens mainly due to a lack of proper risk management or control over emotions. Learning many indicators or strategies will not help you to protect your capital until you manage your risk effectively.
HOW TO MANAGE RISK?
While discussing risk management, the risk to reward ratio is to be explained first. The risk to reward ratio is the method to calculate how much risk to be taken in a single trade to the expected target to be achieved in the same trade. We at livelong wealth trading community usually follow 1:2 or sometimes 1:3 risk to reward ratio in a trade.
It means if you are entering a trade with an expectation to get Rs2 profit then you are ready to risk or lose maximum Rs1 in that trade. While sometimes we take less risky trades like 1:3 ratio too.
To know its importance, I will explain it with proper calculations.
Let us assume that you are a complete beginner in stock markets and you started trading with Rs10,000 every day for a month. Out of 30 days in a month say you traded for 20 days, with 2 trades daily. According to probability there’s a 50% chance of winning any trade. Therefore out of a total of 40 trades you may win 20 trades and you may lose 20 trades by simple probability. You will get Rs2 in each quantity of winning trades and lose Re1 in each quantity of losing trade.
Rs2x20 trades= Rs40 in one quantity
Re1x20 trades= Rs20 in one quantity
Even by losing half of the trades, you are not getting any loss at the end of the month. While if the person is using any advanced trading strategies his winning accuracy will be around 65 – 75 %. Therefore the net profits will be higher. The advantage of the risk to reward ratio is not only protection capital but also booking profits on time.
Controlling emotions, is another important thing every trader has to look upon too. Trading seems to be very thrilling and addictive in the beginning. But beginners may quit trading when they lose a huge part of their capital. Capital erosion mainly happens when you take a trade based on emotions rather than on strategies. Never allow your greed or fear to judge your decisions.
Plan your trades properly. In our community we take trades based on our backtested strategies. These strategies are mainly derived from previous day charts. Therefore, one can plan his trades in the previous night itself. Which stock to trade, at what point to enter, what will be the first target, how much capital to be used, how much risk to be taken will be planned before entering the trade.
The allocation of funds is the next important factor to be looked upon. We always guide our members not to pool in your enter hard-earned money at the beginning itself. Start trading with a capital maximum of Rs2000 and not more than that. Increase tour capital only after learning and practicing strategies properly. Also never allocated entire fund in a single trade.
Also, try not over trade. We suggest taking a maximum of 3 or 4 trades in a day. And also don’t take two trades at the same time. concentrate on one stock at a time.
Therefore, we always say to become a successful trader having proper discipline, and control over emotions is more important than leaning many strategies or indicators.