Risk Manage your Stock Market Trades

By: Greg Secker 

Successful stock market trading is about managing risk, period. If you are currently trading and have not mathematically generated a risk-based formula, stop trading immediately!

Trading is a numbers game. Every single trade you place must be considered as "a trade in a sea of many trades". Some trades will work out, others will not - that's life. Your job is to make sure that the ones that do not work out don't hit your account like a freight train - they must be risk managed. This is why it is essential to learn how to trade on the stock market. One of the biggest causes of failure amongst traders is the inability to manage risk and control losses.

It is very important to remember this cardinal rule: Huge Money is Only Made When a Little Money is Risked. So what do you do if your trade drops below a pre-defined level, you must exit - no hesitation. Sure it will hurt but as a successful trader you know that this is part of stock market trading - consider it learning capital.

Being a successful investor or trader isn't simply about winning more trades than you lose. It's about controlling your losses so that the profits from your wins will outweigh the losing trades. The wrong way to pick a stock is not using any kind of system. Never just put money on a trade because it 'feels' right - Use the reward to risk ratio to decide whether or not to invest.

You must always calculate the right amount of funds for a trade. To calculate the trade size you must measure the potential risk against your available funds. So once you have identified a stock, the next step is to calculate the Reward: Risk ratio using your stop loss and a realistic target price. Your Reward: Risk ratio should be 3:1 or greater. The Reward is worked out by your target price minus the entry price, the Risk is worked out by entry price minus where you have put your stop loss. Then quite simply divide your Reward by your Risk. If the target profit price is at least three times the risk then the trade makes sense. If not, look elsewhere. You may well be right, and the share may well go up, but trading like this is too risky and will most likely lead to failure. By following these rules you can make extra money fast.

When you next scope out a potential trade remember this advice and you will become that successful trader you always envied. 

Article Source: ABC Article Directory


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