Risks are the very essential part of the trading and for protecting your capital one will definitely need to avoid those risks, which will for sure put you out of the business. With every trade which you do in the stock market, you are just opening yourself to risk. And the thing about this is that only you can control this, all you need a plan and need to know how to manage your risks.
For being in the elite and superior class of trading one should be able to imply effective risk management tools or techniques. A thorough study of Risk management can provide you a firm hold on your trade and let you to be the trader whom you want to be. All you need is the right tools and the right way to apply them, and a whole world of new possibilities will open for you. But the question comes how and why it’s so important. Benefits of risk management-
The margin requirements are reduced
Your trade controls are improved
Unnecessary risk exposure is eliminated.
With this you can control your fear of trading
It boosts your account return.
Lifts your percentage of success
And your conventional way about trading.
There are various tools and techniques available in the market and a few are listed below which will not only tell about them but also how to implement.
Stop loss orders (SLOs)
It’s basically the point which once set in your transaction where the stocks are automatically sold off whenever the market price reaches the benchmark. It is also known as a money-management stop. The main motto of this tool is to minimize the losses of your every transaction as per the defined maximum amount. Although the opinions may vary from people to people about this tool. Few says that SLOs tend to hamper the ongoing trade as its basic tendency is to go through a number of steps which therefore omits the number of trades before the market bounces back. While others say, trade should be always going on rather than stopping on SLOs figures. And yet many are still in favour of this. What matters is the approach which can create or maximize the profit over the particular period of time in the market.
Trailing stop loss orders (TSLOs)
It is very similar to SLOs but it also enables your profit growth, where SLOs were keeping your losses small. In other words, it is an order which you can place when the stocks can help to minimize and even can protect the potential profits. It is one of the key tools which is available for risk management. Sometime it helps you in keeping your emotions out of your trading decisions, as emotions can often turn your profitable trade into a loss which further winds up in becoming the loser in trade. Once put in, it will automatically adjust its price which is based on the settings, which you have created on the initiation of the trade.
Guaranteed stop loss orders (GSLOs)
It is generally used by the cautious traders who want to protect the disastrous losses in their trading accounts. So it basically minimizes your worst case scenario by just capping the downside stop losses. Most of the GSLOs are placed around the 5% away from the current price. The GSLOs are usually at the discretion of the CFD broker hired by you. It can’t be placed in the stocks that are going through the corporate actions and can be placed over telephony but not online. Most of the CFD brokers either don’t give GSLOs or if they do, they cost more 0.3% – 0.7% than the standard order, on the total position size. It works the same way as we pay for our protection as premiums. Its goal is to not let our stocks gap down excessively, but if they go that way it allows us to purchase that protects. Although there are time restrictions.
Generally, traders or speculators who feel that they need extra protection during the uncertainty or who trades at excessive amount of leverage or to those who needs a safety net for the worst times in the stock market. If considering the risk tolerance of the traders which is indeed different from each other’s it only comes onto the appetite of one or in other words your desire to eliminate the worst.