Risk Management Methods in Stock Market


The principles to minimise losses in stock market is actually controlling your emotional reaction on the market fluctuations; plunge and surge

  1. Small Loss

It sounds like a common sense to many but ironically it is not commonly practiced by stock traders. They try to balance even this loss to make it up in equivalent securities.

This happens majorly due to two reasons:

1) the trader has no risk management rules (doesn’t use stops, doesn’t hedge, doesn’t

manually close at designated area), or

2) the trader doesn’t adhere to them.

You need to have a specific plan and open a demat account to move your risk to minimal level. It should have threshold of maximum risk per trade per unit. This is perfectly acceptable and the smart way to move risk.

Moving your stop or increasing your risk (adding to your position) when that is not a part of

your trading plan will eventually be the end of your account. Do not make a contingent plan in response to your trading options. You need a definite plan with clarity that unless the risk management section of your business plan calls for you to increase your risk or average into positions, you don’t go for it.

This way you risk as small as possible on every trade.

  1. Keep Your Risk Per Trade at Maximum of 4% of Your Account Size

This is on a higher side at first glance but remember this is maximum threshold. Ideally your risk threshold in trading should hover around 1% but 4% gives you leeway to understand the stock market deeply. You already have an equilibrium budget to absorb this expected loss. It is done in a planned manner with estimation. Your focus is not budgeted 4% loss but around 1%. No one trades for making loss.

  1. Move the Pie Based on Situation

Great traders don’t always trade the same size. You must be able to size up and press when

the situation presents itself and everything is lining up and also scale down and slow down

when things aren’t aligned or you, personally, are out of sync. No one is stopping you to exit using trading app. Your smart decision lies knowing the exact context and reasons for fluctuations.

  1. Setting Stop Loss Points Threshold

A stop-loss point is the decided price threshold at which a trader sells a stock to take a loss on the trade. This is not done willingly but in a planned format so that future waiting period do not incur more losses on the trade. This stop-loss point is executed when a trade does not perform the way a trader had expected. The points help in minimising the risk and stop further escalation of the losses. The greed to seek more time for recovery does not arise. Emotional reaction is controlled. For example, if a stock breaks below a key support level, traders opt to sell as soon as possible.

On the flip side, a take-profit point is the decided price threshold at which a trader sells a stock to take a profit on the trade. This is done for stocks that is not seen as promising after certain key support level. This usually happen when the additional upside is limited due to risks. It absorbs the correction that happen with sudden surge in the prices of stocks.

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