Trading is undoubtedly risky. Remember, as a trader, you have no control over prevailing market conditions or external events likely to impact trades, like natural disasters or civil unrest. So, expect to make some losses along the way.
But that doesn’t mean trading should go hand in hand with crippling losses. Through risk management, you can cut potential losses and protect your trading capital. Here are a few risk management hacks that can help do that.
1. Use Stop Loss Orders
A stop-loss order helps you keep potential losses under control. If you put a stop loss on a specific open position, the order will automatically sell when your security reaches a predetermined price.
For instance, suppose you buy certain shares for $200. In that case, you can set your stop loss at $180. If the security’s price drops below this price, the stop-loss will get triggered and close the position immediately, preventing further loss.
If you don’t know how to set a stop loss order, it’s high time you improve your knowledge base. Take certified courses from a reputable platform like AvaTrade new Academy and use this golden opportunity to become more knowledgeable and hone your skills.
2. Diversify Your Portfolio
Your trading portfolio covers every asset that you hold as a trader. These may include commodities, stocks, derivatives, and bonds. Most people consider bonds and stocks as core building blocks in trading portfolios. But you can grow your portfolio with other investments, including art collectibles, real estate, and valuable paintings.
If you want to protect your portfolio from crippling losses, prioritize diversification. Simply put, spread your investments to as many assets as possible. Diversification is one of the time-tested ways to reduce your risk exposure and minimize your portfolio’s volatility over time.
If you decide to diversify your portfolio, spread your wealth as much as possible and use index funds. Also, ensure you understand the dynamics of portfolio volatility and avoid lousy investment vehicles.
3. Set Trailing Stops
Trailing stops are different from stop loss orders in one definite way. When using a trailing stop, your trade will remain open, and you’ll continue to profit, provided a security’s trade is moving in your favor. If the price shifts by a predetermined amount or percentage, the order closes the involved position, minimizing losses and maximizing gains.
Most experienced traders favor trailing stops because they offer a dynamic risk management approach and automate the stop loss adjustment process. But if you’d like to reap maximum effectiveness, try a combo of stop loss orders and trailing stops.
4. Keep Emotions in Check
Trading can lead to varied strong emotions and detrimental consequences. For instance, while on a lucky streak, greed may encourage you to ignore your trading plan. On the other hand, the all-too-common fear of missing out may lure you into trying an uncertain position or holding onto losses. Other emotions include frustration, stress, and regret.
To cut down losses, check your emotions before trading.
Effective risk management plays a significant role in ensuring your success as a trader. That is why you should apply techniques like using stop-loss and trailing stops combos and diversify your investment portfolio. Don’t forget to manage your emotions because they can lead to impulsive decisions and immense losses.