Risk Management In Trading

Risk Management

Stock market provides the same chance for investors to take their return, but so many investors could not earn enough returns and lose money, why ? Because they do not know what is risk management and do not use it. 

There are different ways and definitions about risk management.  Some people call it position sizing, while others call money management.  Most of the books presented Risk Management so complicatedly that common investors unable to understands formulas for calculating the risk.  But, in this user-friendly handbook, we describe it simple and practical as possible.

Maximize Returns

Risk Management is the process of measuring, or assessing risk and then developing strategies to manage the risk, while attempting to maximize returns.  Typically involves utilizing a variety of trading techniques, models and financial analyses.

The potential return from any investment is generally depending to the amount of risk the investors is willing to assume.

Investors will not take on greater risks without the possibility of higher earnings.  This is called the risk premium.  In general, the greater the risk, the higher the potential return, the lower the risk, the lower the expected return.

Different markets have varies risks.  Their volatility varies for example risk in the stock market, and currency market is not the same.

Also, each stock in the stock market has its own risk, because the volatility is varies.  So, if a stock has volatility, you should invest less money in it.

Common Types of Risk

There are several main types of risk, and investors should understand them well because some affect certain investments more than others.

The two common risks that apply to almost all investments are : 

Market Risk

The chance that financial markets in general may rise or fall in value.

Inflation Risk

May be the most important factor for long term investors to consider, because inflation is cumulative, and it compounds just as interest does.

You can’t control the inflation risk, but with a good strategy you can manage and control the affect of market risk on your stocks.

A professional trader always tries to understand and control portfolio risk.  Before entering into any trade, good traders first think about how much risk to take and how much risk exposure comes with a
particular trade selection.  Only then to they allow themselves to think about how much profit they stand to make.

Prudent investors always close their position and exposure if they determine that a portfolio carries too much risk.

Risk Management for a Trade

Before you decide to trade consider to these fundamental principles :

• Before you trade a stock, know how much you are willing to lose.


• Check the stock to be sufficiently liquid, could you buy or sell promptly ?


• Determine the cut-loss level before trading.


• Determine your profit target (take-profit-level).


• Buy the stock only at an acceptable price level.  Use a limit order when you buy a stock.


• Immediately after the trade has been confirmed, enter the stop-loss level.


• Take profit when the trade reaches your profit target.

Portfolio Risk Management

Your portfolio risk will be well under control and you manage your portfolio risk actively, by 
managing the risk of each trade.  Follow the pointers to control your portfolio risk management.

• Determine your overall cut-loss level.  Usually your portfolio should not lose more than 10 per cent of your capital.


• Diversify your investment in at least six or more different stocks.


• Know your overall risk tolerance before building up the portfolio.


• Act quickly when you see your risk limits exceeded.


• Close out the entire portfolio if it loses to your overall stop-loss level.

How To Save Money From Earning

Your Financial Freedom

Money You Earn

Financial Freedom does not happen overnight.  Regardless of what money you earn, or wealth you accumulate, it is, in itself, a form of energy and, as such, also adheres to fundamental principles.

Wealth is Common Sense

The fundamental principle of acquiring wealth is common sense.  Make money before you spend it and spend less than you earn.  Because of the availability of credit, however, common practice is to decide what you want to have and borrow in order to get it as quickly you can.  The principle of becoming something before having is important here.  The anticipation of earning more income entices many to spend more than they should on entertainment and gifts. 

Enjoying Financial Freedom

Money management is absolutely essential to enjoying Financial Freedom.  Regardless of what your future income may be, you will have very little chance of saving anything, unless you discipline yourself to start, now.

Money Management

Perhaps, because they experience so many individuals and couples beginning to enjoy larger income.  Amway increases the awareness of this discipline through their advisory manual.  This is made available to their direct distributors, who reach the position of dealing with them direct, to provide valuable information towards achieving financial independence.  For example, in the section under Money Management they state : “Saving is a discipline which must be practiced.  It is not a dividend that comes with higher earnings.  You must plan in order to save and the only way to do this is to set a side a certain part of everything you earn”.

Your financial Success

It is important to know how to deal with your wealth as it begins to come in.  There is no better concept than Networking to propel the individual towards Financial Freedom.  But only your actions, with regard to dealing with your financial success, will determine that you keep your Financial Freedom.

Principle of Success

It is only your actions that will allow you to build towards your Financial Freedom.  Harnessing the Principle of Success, together with the powerful Networking vehicle, will take you to where you dream of going and beyond.  Make this the day that you decide, once and for all, to create a clear understanding and acknowledgement of your unlimited potential that already exists within.

Networking Vehicle

Use all the tools that are available to you.  Set your goals, make a commitment and do not let anyone steal your dreams.  True success is having a belief in yourself and accepting that it is having a belief in yourself and accepting that it is just another name for your unlimited power-to-be.  The Networking vehicle will take you there but it has to be driven correctly.

It is over to you.  Are you going to drive it the wrong way, or the right way ?