There is no doubt that trading comes with a few risks. These risks arise from controllable and uncontrollable factors. For example, lack of knowledge of the stock market, herd mentality, and emotional trading are controllable factors. However, factors such as recession, political unrest, or the COVID-19 pandemic are uncontrollable.
However, you can mitigate these risks to a considerable extent and improve the possibility of better returns and higher margins with a risk management strategy. Let’s understand this further.
Meaning of Risk Management
Risk management is a valuable tool that enables you to identify and analyze trading risks before you buy or sell.
The right risk management strategy depends on your risk profile. For instance, if you are an aggressive trader, you are open to more risk and may try to earn quick profits through the day trading of fast-moving securities. If you are a conservative trader, you are more likely to aim to protect your capital, keep a long-term horizon and diversify your portfolio.
Importance of Risk Management
Here are a few reasons why risk management is crucial.
1. Make Informed and Quick Decisions
There are times when you need to leverage market opportunities quickly for gains, especially in the derivatives market. You can’t wait patiently for the right time to buy or sell. Risk management enables you to make an informed decision while taking calculated risks. You can trade or choose exit points at favourable levels.
2. Diversify Your Stock Portfolio
Risk management also comes in handy when you want to cut down your losses by optimizing your stock portfolio across different industries and market caps. This is because different stocks carry different risks. You can allocate your portfolio to ‘high risk-high return potential’ stocks, ‘low risk-low/stable return’ stocks, or a mix of both. You can consult share market brokers to understand portfolio diversification.
3. Calculate Expected Returns
When you have carefully analyzed the potential risks, you can easily compare various stocks to determine the possibility of gain or loss. Accordingly, you can trade in only those which have better chances of profitability.
4. Trade in the Forex Market
International market risks are more dynamic. If you are looking to enter the forex market and trade in currencies, risk management is a prerequisite. Risk management will protect you against the potential risks of currency market fluctuations. Make sure to use a reliable Indian forex trading app to trade better and safer in international markets.
5. Plan Stop Loss Strategy Effectively
Stop loss is a buy or sell order which gets executed automatically when the stock price reaches a specified price called stop price. This strategy can minimize losses significantly, especially when you are trading in multiple stocks continuously. When you manage your risks correctly, you can manage the stop-loss strategy in your favour.
Risk management is an integral part of trading. However, no matter how much research you do, you may not be able to reduce or eliminate all risks. Hence, you should seek the professional expertise of financial services platforms like Ajmera x-change. A reliable SEBI-registered stock market and mutual fund advisor, Ajmera x-change can conduct in-depth market research and provide effective advice to protect you against trading risks.
Get in touch to know more.