Risk management is an important concept in daily trading. It is a key concept because of the significant risks involved in the market. It is estimated that most people who start trading lose their money.
“The danger comes from not knowing what you’re doing.” It is a quote from famous investor Warren Buffett. One of the many lessons every trader can learn from the WB, even using a completely different approach to it.
Risk is something that is always involved in the financial markets…but also in the decisions that every trader is asked to make. We want to focus our attention on the latter.
So, in this article, we are going to look at some of the best risk management strategies to use when day trading.
There are many risks of trading in the financial market. In most cases, these risks are divided into: Systematic and unsystematic risks.
regularity The stakes are Affect the broad financial market. For example, the collapse of Lehman Brothers had systemic risks for the banking sector and other parts of the market.
Likewise, the collapse of FTX and Terra had significant systemic risks for the cryptocurrency industry. Terra’s collapse bankrupted companies like Three Arrows Capital and Voyager Digital. Likewise, the collapse of Voyager Digital led to the collapse of other companies.
Some other big systemic risks in the market are: Big disappointment and dot com bubble among others. a Systemic risks can spread across else financial assets. For example, it can move from commodities to stocks and other assets.
that Unsystematic risk, on the other hand, is not extensive. He. She It is not widely shared across the broader market.
For example, some of the most significant unsystematic risks are liquidity crunch, labor strikes and management inefficiency. This unsystematic risk is limited to a particular asset.
Risk Management is an important concept This indicates a process Minimizing risks in the market while maximizing returns.
It seems like controlling losses and keeping your trading capital safe. Without it, you will often find yourself incurring significant losses And exposing your account to great risks.
There are many benefits to risk management, including:
- It helps to reduce the amount of losses you can make on each trade.
- helps to Improve your mental health.
- A good risk management strategy helps Reduce anxiety when trading.
- It can also help you raise capital for your small hedge fund.
Errors are born from the human factor
As we indicated in the introduction, we don’t want to analyze all risk management strategies (we have an article dedicated to that). Here we want to emphasize Mistakes a trader can make by Deciding to trade in stocks (or other origin) he does not know.
In short, human error.
Let us now take a look at some of the best risk management strategies that you should use in day trading to avoid this common mistake.
You don’t have a trading plan
A trading plan is an essential tool to use when day trading. Refers to a systematic process Identification and trading of securities in the market. The plan will help you Make good decisions In the market. A good trading plan should contain a few key parts.
- Osoul Trading – Instead of trading dozens of assets, the plan should You have a list of assets that you will trade. Most traders focus on one or two asset classes such as stocks or commodities.
- It’s time to trade Instead of trading all the time, a good trading plan will help you determine the best times for day trading.
- Trading strategy A good trading plan will help determine the best strategy to use. As such, you will not use multiple strategies in the market.
- Risk management strategies A good trading plan includes provisions for the risk management strategies that you will use in trading.
This advice will be enough to avoid blind trading by betting on assets that you do not know.
follow the crowd (blindly)
Another approach to risk management is to avoid following the crowd blindly. For starters, following the crowd refers to a process Do what others do.
For example, if the market is buying tech stocks or cryptocurrency, you would do the same. Likewise, if market participants are selling shares, you do the same.
after the crowd It can be profitable sometimes. However, in most cases, you will often find yourself losing money when you follow the crowd blindly.
Instead, you should Always work to do Research before executing the transaction. Find out why they trade the way they do and then find a catalyst.
In other words, avoid the fear of missing out (FOMO). FOMO is when people buy what other people are buying and live the opposite.
Some of the most important catalysts You can use them in stock trading, which are: profitsAnd the merger and acquisitionAnd new and new product launch Management change.
We are all emotional beings. However, to be successful in the market, you need to Make sure you are in a good place emotionally. You often make trading mistakes when you are trading in a stressful period. For example, if you made a big loss, there is a good chance that you will make another big loss.
Related “ How do you deal with huge trading losses?
Sometimes, being so happy It can also lead to huge losses. For example, if you make a big profit, you can assume that the following trades will also be profitable.
Therefore, in risk management, always make sure that you are You have a good emotional balance. In other words, make sure you don’t let your emotions control you.
Trade what you don’t know
There are a lot of assets in the financial market. For example, in stocks, there are thousands of publicly traded companies. Likewise, there More than 20,000 cryptocurrencies dozens of commodities.
Therefore, you may find yourself interested in most of the assets. We recommend that you do Focus only on trading assets that you know And those about which you have a good understanding.
For example, if you are a stock trader, focus on a limited number of stocks. Likewise, if you are a cryptocurrency trader, focus on a small number of them.
In this article, we have looked at some of the best risk management strategies to use when trading. We understood how easy it is to make the mistake of trading something we don’t know, and how it can lead to huge losses for your portfolio.
Luckily , The solutions are easy to apply. We recommend that you use these methods at all times when trading.
Useful external sources
- 7 insights from legendary investor Warren Buffett – CNBC