How Risk Management Can Save your Trading Account
Commodity trading in India, or indeed any sort of stocks and shares trading, has an inherent amount of risk associated with it. There will not be any trader who has not faced, or who will not face a loss of some degree at some point in his or her trading career. Losses come as part of the package, but with careful planning they can be limited to such an extent that the trader’s entire account should not be wiped out. Planning ahead to deal with losses before they occur is called Risk Management.
Why is Risk Management Necessary?
Without the implementation of risk management techniques, it would be incredibly easy for a trader to lose all their accumulated profits as a consequence of just one or two bad trades. As we have already mentioned, losses are a given in the world of trading. Losses can be overcome and worked through, but heavy losses can put an end to your trading account and mean you would have to begin again from scratch. You will begin to appreciate the importance of commodity trading risk management.
Stepping out onto the path of online commodities trading is like beginning a long-haul flight. You would not take-off without ensuring there was sufficient fuel in the tank. Not only sufficient fuel, but enough RESERVE fuel to last you through any unforeseen complications and diversions along the way. It can never be assumed that a flight will go smoothly from take-off to landing, as there are many variables that are beyond the control of the pilot. Just as a flight without safety measures could be a death-trap, online trading risk management will be your safety measures to ensure you do not crash your trading account to zero.
Risk Management Techniques
Do not take big risks. Excessive use of leverage has seen many a trader commit trading suicide by taking unnecessary and avoidable risks. Never be over-confident, over-emotional or headstrong. Always assume you could lose, and make sure you can cope with the loss. Have a plan and stick to it. Decide the price at which you can afford to buy and can afford to sell. Do not make the trade if it does not fall within your planned limits. Very rarely does a trader make his fortune from one or two huge trades. More than making large profits on one trade, the success comes to those who can make small profits but do it consistently and regularly, while at the same time avoiding the losses.
The 1% Rule
A tactic used and recommended by many traders is called the 1% rule. When following this, you should never put more than 1% of your entire capital into one trade. This works for all occasions, as the value of the 1% will be higher depending on how much capital you own, but you will always be protecting the rest of your capital.
‘Stop Loss’ and ‘Take Profits’ Technique
Decide in advance how much loss you can realistically afford to bear. Sell when the stock reaches your cut-off point and bear the loss. Do not let emotion take over and bury your head in the sand by convincing yourself that it will rise up again. Decide in advance how much the stock needs to rise to before you will sell it and take the profit. Do not get over confident and convince yourself that the value will keep rising further. Sell at your cut-off point and be happy with the profit. Holding out for more can, and frequently does backfire.
If you wish to use this technique, you can use a calculation of [(Probability of Gain) x (Take Profit % Gain)] + [(Probability of Loss) x (Stop-Loss % Loss)] to calculate your expected return. This is invaluable in helping you make the decision of whether or not to buy stock.
Markets can be volatile. It would be unwise to concentrate only on one commodity as an unexpected crash in value would be catastrophic for you. If you diversify between several different commodities, at least it would be possible for the others to cover the losses suffered on one.
Take Expert Advice
For the inexperienced trader, this business of trading risk management may seem like rocket science. Expert advice is always on hand from GOODWILL INDIA. Their experienced staff pass on their expert knowledge to new traders in a way that makes sense to them. Remember not to take-off that flight until you have safety precautions in place. GOODWILL INDIA will provide you with the safety precautions you need to fly the right path to commodity trading success.