How to manage risks correctly and responsibly in capital market trading, first, let’s dwell for a moment on the title, “Risk Management” Why in capital market trading do we manage risk, why not manage profits?
The reason for this is simple, trading in the capital market involves financial risk, resulting in mental rhetoric and rational rather than emotional behavior. When we approach trading in the capital market, we must arrive in advance with the knowledge that we are certainly going to lose money in some cases, there is nothing to do, in some of our trades as traders we are going to lose money, and not necessarily because we did something wrong, it’s just that, So simple.
The first step in a trader’s inflation is to know how to control losses. Long before we even think about profits we need to know how to deal and how to control the losses we expect in trading so that you know how to control your losses and manage your trades in such a way that you give space to trades that go in your direction and cut early trades that do not go in your direction.
Risk management and control of losses will allow the emotions to be managed in a calculated and controlled manner and thus not lose control.
Let’s start with some numbers that are commonly worked with as traders in terms of risk management, let’s say you have opened a trading account for $ 10,000, in capital market trading it is customary to define in advance what is the maximum daily loss we can deal with, both mentally and in terms of trading account.
If, for example, at first you set a daily deposit of $ 200, but after a few days of trading, do you see that this amount is too heavy for you? In this case, you must limit the maximum daily risk to the amount you can successfully deal with.
But wait, what if you can afford a daily loss of $ 400, or even $ 1,000 a day? Here the situation is already getting dangerous, you may mentally be able to deal with a loss of 10% on the day of the portfolio value, but in terms of your trading account the situation will not be so bright if you lose 10% of the account value on a single trading day.
We will end the article with a few lines on the Protection against Loss Ordinance – the Stop Loss Ordinance.
Many traders complain that many times when they went into trading, for example at the long position the stock did not benefit them, and then it came out to them at a stop for a few cents. The stock then soared and rose by 10%, and this only after it took them out at a stop in the defense ordinance and only then did the impressive move they had been waiting for and expecting happen.
But those traders forget that there were many instances where the stock went against them, took them out at a stop and then kept going down, there is nothing to do, we usually only remember the instances where the stock took us out by a few cents and went up and forget the instances where the stop loss order saved us!