Risk Management – Equity Markets

Many people ignore the importance of managing risk in their positions and transactions. As a trader or investor, this is the only thing we can control. We can not control the direction of the market. We can not control whether we will win or lose in any position. The only thing we control is the amount of damage we will suffer.

For most traders, risk management means setting a stop. Many investors do not even do this to control risk. However, there are many risks in managing the market. You will not drive to the bridge, if you notice that most of the support has collapsed you? You will see a "thin ice" sign and a few cracks on the ice, you will come to a frozen lake? Of course, you will not, it is because you observe the environment and realize that it is too risky to continue.

When we participate in financial markets, we need to follow the same rules. To analyze risk before trading or investing, we must consider the current market environment, security environment and trends. Are we in a dangerous place that will prevent us from doing business? Assuming the market is bearish, your security has just released a disappointing gain and is close to supply in your trading time frame. Will you buy the stock just because the price rises slightly? Probably you will not. Even if you have a short-term bullish action, the overwhelming bearishness of the market tells you that the environment is risky and the reward is not big enough to support a long-term position.

Many people can plan a trade, but not everyone has the ability to analyze risk and manage risk When the market problems. And believe me, they will from time to time.

There are three main risk management techniques I would like to discuss here:


In trading and investing, frequency is what we are going to open quantity. The problem for many traders / investors is that they will try to take advantage of all the opportunities and open positions they see, with very little chance of success. They do so because of fear of losing market opportunities and profits.

Successful traders / investors have more selective discipline when opening positions, and only deals that meet certain criteria outlined in their plans and offer high profit probabilities. As a new trader / investor, you should limit the number of trades you take. This will force you to look for appropriate trading opportunities, rather than any small tricks in the market. Remember, even if you miss an opportunity, it is likely that another will come soon.


The second technique is the duration, or the amount of time spent in that location. The longer you spend in a position, the greater the chances of unfavorable price changes. This is why investors take greater risks in the market than traders. When we focus on smaller time frames, our profit potential is smaller, but the risk is smaller. Trading on a smaller time frame reduces the risk we face in trading.

This does not mean that we should not benefit from a longer time frame position. You can compensate for the increased duration risk by reducing the size and / or frequency of the other two factors. Long-term traders and investors can still manage risk well.

The period may also need to be rejected when the overall volatility of the market rises. Higher volatility leads to more severe price volatility. As a new trader not accustomed to trading these fluctuations, you'd better reduce your exposure by trading in a smaller time frame

Volume is your most important risk Management plan. Process: Volumes are the most important aspect of a risk management plan. The number of traders / investors is the share of each of our positions. Obviously, most people want as much profit as possible, but by occupying a larger share, we also increase our risk. The volume should start as practice, in the demo account, no money is at risk. After successful practice, you can increase the risk with the least amount of stock. If you keep well, gradually increase your share.

The keywords in the last sentence are gradual. Many traders think they must be from 100 to 1000 shares, or 1000 to 10,000 shares. This will increase your risk tenfold! Your interest will not exceed your share or the risk of each step, and only if you do achieve a positive win / lose ratio. When you take more money in a position, you will notice a psychological effect. The observed increase in profit and loss index may undermine the psychology of the new trader. This can cause you to panic and exit the position too quickly, or hold the loser when you are frozen by fear.

If you are not trading or investing at any time, you should immediately check your risk management. The first thing is to reduce your volume (share the size). Second, in your position more selective, lower frequency. Finally, you can reduce the duration of the trade to offset volatility.

Everyone has a different balance of these risk management tools that they should use.