Five ways active traders can manage their risk for better returns

Knowing all the do's and don'ts of trading in regards to learning process and failures, one needs to be clearly focused on the risk management

Avdhut Bagkar | Business Standard
12th March

Five ways active traders can manage their risk for better returns

Trading is a unique way to generate revenue in the investing world. While, this may seem to be rigorous and risky, an organized trader can make extravagant returns. All this is possible if the trading techniques are withhel with proper risk management and disciplined behaviour.

Trading in an art a trader develops over a period of time with varied experiences and uncertain situations in the stock market. A skillful and well-equipped trading system does provide assistance in wise trading times. Besides, knowing all the do’s and don’ts of trading in regards to learning process and failures, one needs to be clearly focused on the risk management.

The trading process involves a greater degree of risk and returns as well. Majorly, they are directly proportional to each other however; if the risk factor is well managed the returns can be phenomenal and this too with minimal risk. Besides overleveraging and confused mind, there are other factors which also play significant role in managing risk. These are: -

Stop-loss

The most noteworthy aspect of trading is maintaining a proper stop loss. Before entering in any trade, one has to clearly define the maximum loss that can be bore. This helps to build confidence in trading with maximum pain in mind, if the trade goes wrong. Secondly, this behaviour also neglects the unnecessary noise in the markets helping to mindful.

Trade on confirmation

Unless the trading model or system does not display a full confirmation, don’t enter in any trades. Trading without proper triggers or signals lead to confusion and loss of trading conscious. These interns have resulted in losses which are unbearable. Whatever the trade you execute by conscious so, it has to have full confirmation otherwise the probability of losing are considerably higher and destroys morale.

Risk to Return ratio

With a proper knowledge of buying and selling, it is necessary to find the risk to return ratio. This enables trader to determine the outcome of the trade. It looks bright when trend favour your decision, but having uncertain targets also draw risk in booking profits. Try to keep profit stop loss or trail position for the better judgment. Each trade may have 1:2 ratio, but if the signal and confirmation is strong, even 1:1 ratio have fruitful gains.

Stop listening to other traders

This is the great mistake that most of the beginners make in trading. Unless one does not develop amn appropriate strategy or model, entering in a trading world is more of gambling than playing wisely. Do a deep study of various models; understand the shifts of sentiment, market theory, etc. to to be caught up in rumours and unpredictable views of the surrounding.

Be disciplined

It is utmost important to follow simple trading rules such as keeping stop loss, trading on confirmation, and not to over leveraging positions. All this facilitate confidence and support in rejuvenating the trading model for even better performance.

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