Trading, whether that is FOREX or stock, has a variety of risks associated with it, the main one being losing money.
Obviously, being a trader, losing money is the last thing you want, so risk management is vital when trading. With the rising use of advanced technology to assist first and traders, risk mitigation can be made even simpler. This is particularly important for professional traders working in large financial institutions and corporations. Here, we’re taking a closer look at how to manage investment risk as a professional trader.
Plan Trades
It’s not smart to go into a trade without any plan or knowledge on what you’re going to do and how you will secure the trade. Without the appropriate preparation, you’re immediately jeopardising your profits because you have no idea about how to make the trade – fail to prepare and prepare to fail as they say. Therefore, outlining any prices that you’re willing to pay as well as the prices you’re willing to sell will increase the chances of you reaching your trading goals. If you want to be a professional trader, this is a necessary precaution to make.
Stop-Loss and Take-Profit
To the average person, these terms sound like complete gibberish, however for experienced traders, they’re essential when it comes to managing profits and ensuring that you’re optimising the amount of money that you make. Stop-loss is the price a trader will sell a stock and thus take a loss on the trade. Unfortunately, not every trade goes how we’d expect; therefore, you should consider your choices in that event. By putting this point in place, you’re limiting the amount of loss you will have, as it eliminates the mentality of believing the trade will come back.
Take-profit, however, is the price a trader will sell stock and take profit, and this occurs when additional upside is limited due to risks. An example of this would be if stock was approaching resistance level, as traders may consider selling before a period of consolidation commences.
Rejecting Break-Even Stops
By creating a “no risk” trade, you are seriously putting any chance of profits in danger as they can completely manipulate the amount of money that you will make. Whilst protecting you position is important, a break-even strategy can lead to an array of issues. If you’re trading on the basis of technical analysis, the entry is usually very obvious and therefore others are likely to have a very similar entry to you. Professionals, however, would understand that you can see that price retraces back and pushes novices at obvious price levels, allowing the professionals to make a significantly better trade than usual. So, a break-even stop will get out of profitable trades if you decide to move your stop too soon, making this a less favourable method due to the risk associated with it.
Analysing Your Win Rate
By keeping on top of stop-loss and take-profit points, you can calculate your expected return, which is important because it makes traders consider the methods they’re using and thus make any alterations to techniques that aren’t working so well. Previous trades can be compared, allowing traders to understand why certain trades were more profitable, encouraging them to use this strategy more often to improve profit.
This is not only important for professionals hitting the market as a novice, but this is also imperative for businesses of all sizes – from large corporations to SMEs. Managing investment risk can be helped by the latest advancements in financial technology on a number of scales, and being open to innovations in the market will ensure that your business is continually at the forefront of the industry.
