5 Most Effective Risk Management Techniques For Traders
Anyone wants to get a good return from investing their money but, that can only be possible if you protect your hard-earned money by making proper strategies against all the risks in the trading market. See, as you know that the trading market gets you intense profit much more than any other traditional safe schemes which are very renowned in the society, the trading market also has many risks. But those risks can be easily managed by proper planning and management, and you will receive great success in your trading career.
So, now let’s go through the best risk management techniques in trading –
- Portfolio Allocation: It is never a wise decision to put all your eggs in one basket as you may lose it all in one go. The same goes with trading. If you invest all your assets in one type of trading, you may face a huge loss for any risk in that trading field. That’s why experienced trading advisors suggest properly plan and allocate your assets in different profit-making fields so that the returns and risks remain properly balanced to get you a consistent profit.
- Limit Losses By A Stop: Trading does not always bring you profit, sometimes you have to face losses in trading but there are ways to avoid or control those losses. One of the ways is to know your different trades individually because each factor affects each trade differently. So, you need different risk management techniques for them.
Another great method is to set up the thresholds to which you can bear your losses before selling and mostly it is a percentage of the initial purchase price. This is something you can gain from experience and it will help you greatly in your trading.
- Protecting Your Profit By Trailing Stops: It is beneficial for a long position because it follows the price of the asset when it moves up but, stays put if the price goes the other way. And for a short position, it’s the opposite.
It is also recommended by experts to lift the stops every time the stock hitting a new high. And it is also recommended to put the stops on a closing basis instead of putting it intraday otherwise you may be shaken out of stocks that drop suddenly only for a quick rebound such as in a flash crash.
- Position Sizing For Optimizing Your Risk Level: Risk Level depends greatly on the sizes of your positions. So, to optimize your risk level, you should maintain such sizes of your positions that you face the minimum or no losses.
The best way to determine the size is that the position size to be proportional to the expected outcome which is the probability of gain making multiplied by the gain amount, plus the probability of loss-making multiplied by the loss amount.
- Using Covered Calls And Minimizing Downside Risk: Selling the call options for your shares each week or month is a great way to reduce risk in holding stocks and ETFs, and also to increase cash flow simultaneously. It is done by selling the call options of your shares which you still own. This may put a cap on your upside but you will gain weekly or monthly income to protect part any downside move.
Following this consistently for many months and years, you can adjust the risks of buy and hold and can get a good performance.
This method is followed by both experts and beginners for many types of assets.