If you look at the history of trading disasters in the world, one common thing you will come across is tend to trade much beyond the risk that they could take on. Making mistakes is part of the learning process when it comes to trading or investing. Investors are typically involved in longer-term holdings and will trade in stocks, and other securities. Traders generally buy and sell stocks, hold those positions for shorter periods, and are involved in a greater number of transactions.
RISKS OF TRADING MORE THAN YOU CAN AFFORD:
Every Investor with limited capital and hence capital protection becomes the primary focus of every investor. Do not lose sight of your risk tolerance or your capacity to take on risk. You obviously cannot protect your capital if you recklessly take positions in the market. For example, if you are trading futures market then taking 5-6 times leverage with tight stop losses is understandable. However, if you leverage to the tune of nearly 10 times then you are running a huge risk that you cannot afford. Even a 2% movement can have almost impaired half of your total capital available for trading. Things can get worse in trading if you are also going to add overnight risk to your trading portfolio. When you carry forward positions to the next then there are lots of developments in the US, European and Asian markets that could make the trade go against you. In fact, if you are adding overnight risk to your trading portfolio then you need to get a lot tighter in your risk management. Limit the risk that you take on your positions.
5 WAYS TO KEEP YOU’RE TRADING POSITIONS IN CHECK…
1. Even at the risk of repetition it needed stop losses must for every trade. Not just as an afterthought, but stop losses must be part of your order on the trading screen.
2. Another method is to keep limits on losses on a daily basis. This can vary based on the size of your capital and how much you can afford to take, but it is the discipline that is important. For example, on a trading capital of Rs.5 lakh, you have a 5% limit of losing maximum of Rs.25,000 in a single day. At that point, you must have the discipline to shut down your trading terminal and stop trading for the rest of the day.
3. The third discipline pertains to how much capital you are willing to lose. This is important because every trader starts off with limited capital. It does not matter whether the trader is a small trader, or George Soros. Capital is finite, though the quantum may differ. The focus must be on deciding at what point of capital loss you will get back to the drawing board and rethink your strategy.
4. Always attribute a cost of capital into your trading account. If you keep idle money in your trading cost, it has an opportunity. At least it can earn 7% in a liquid fund. Take that as your opportunity cost and keep that in your calculations when you calculate your capital risk. Your situation becomes a lot clearer.
5. Base your risk on the profit you make. For example, once you have made profits on your trade, you can classify that into core capital and earned profits. You can take a higher risk on earned profits and lower risk on core capital. This will ensure a more even distribution of risk.
If you have the money to invest and are able to avoid these mistakes, you could make your investments pay off; and getting a return could take you closer to your financial goals.
With the stock market's partiality for producing large gains (and losses). As an individual investor, the best thing you can do to keep your portfolio for the long term, that you are comfortable with and willing to stick to.
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