Why Risk Management is Crucial in Trading?

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The untold secret about the world of Trading is, “Try and Increase the controllable and reduce the uncontrollable”

The above quote might sound impossible at first instance but if we were to think about it, it would make a lot of sense. If we have a proper understanding of the market, have a set of rules for the trade, and most importantly proper Risk Management in trading then, it would go a long way in increasing the factors which we can control and increase our probability of making valuable returns.

In this blog, we will discuss risk management and important share market tips to increase your profit. We have the best intraday tips site for share market trading.

What is Risk Management?

To put it in simple words, Risk management in the context of trading is the process of identifying, managing, and controlling the risk associated with any trade. To be able to manage the risk effectively would simply mean that one is able to control as much as possible the future outcomes of the event.

We might not be able to completely nullify the risk associated with the trade but, we might be able to minimize the impact of it.

Strategies and Assessment

Following are some of the factors that help us in Assessing the risk while trading:

  • To understand the Context: Understand the current trade setup and what scenarios are leading to the trade in question. And if we are able to do this then we will be able to understand the risk which comes with the trade.
  • Risk Scenarios: After the trade has been identified, it becomes important for us to understand the circumstance under which the trade could go wrong and the risk which is attached with it.
  • Risk Identification:This simply implies the various factors which bring in the risk which is associated with the market and how does it impact the world of trading. The factors could be changed interest rates, the central government taking some steps which have an impact on the market, or could be a simple trade war.

Before making a trade decision, all these factors need to be assessed and you should follow our share market tips. And, if we are well prepared to handle these scenarios, we will be better prepared to trade various products like derivatives, diversifying the risk, etc. follow us for the best intraday tips site.

Importance of Risk Management

  • An investor has time on his side as he is able to wait patiently for the market to move in his direction. But if you are a trader, then you would ideally want the trade to move in your favor as soon as possible. And if it doesn’t, risk management comes into the picture.
  • Options as a derivative instrument are very risky by nature because there are various factors that become a part of it and the most important amongst is ‘Time’. As and when we move closer to expiry, the premium value decays and we might not make any money even though our view could be right.
  • This tool is the most talked about, but yet the most underutilized one. Putting stop loss not only minimizes the loss which one could incur but, also spares time to look out for other opportunities. And using Trailing Stop loss is the best way to protect money if the trade is already In the Money.
  • And lastly, the most important thing that any trader or investor needs to keep in mind is that once the trade is In the Money, the role of target and Stop loss becomes very important. Always keep Trailing your stop loss and don’t be very stubborn about your profit targets. If the market is finding stiff resistance before your actual target, there is no harm in booking your profits and wait for the next trading opportunity. Remember, “Profit in hand, is better than Profit in books”.

Conclusion

Risk Management is the most important skill which any trader must possess. It is more important than having the art of spotting the trades. A missed trade opportunity is much better than having taken a trade and poor risk management in it.

So, it is advised to all the new experienced traders in the market, for a long and profitable trading career one must master the art of managing the trade and most importantly managing your trading capital and you can also follow us for best intraday tips site.

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