Risk Management (8)

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Updated: 11 September 2020

A proper risk management approach can help traders to reduce the potential for losses when the market moves in unexpected directions.  That’s why we created strategies that can help you protect your investments and limit risk exposure when unexpected things happen in financial markets. Furthermore, we included articles on the psychological approaches to risk, as well as a plethora of practical tricks to manage real-life situations. Cover all the basics, and your trading funds will become much safer in no time.

Planning Favorable Trading Outcomes

Proper planning for favorable trading outcomes can help to improve objectivity and this is a strategy that many traders use to remove psychological emotions from the process. Specifically, risk management strategies allow traders to more effectively identify price levels for stop-losses and profit taking orders. Strategically placed stop-loss orders allow traders to locate specific price points at which positions will close in the event unexpected losses begin to accumulate. In contrast, traders use profit taking orders to establish price points to close positions at a profit. Setting these types of parameters can make it easier for traders to set rules for the level of risk exposure that might be present in any individual trading position.

From the perspective of behavioral economics, an objective approach to risk management can remove many of the problems encountered by traders that become deeply attached to losing positions. Many expert traders have learned from experience that these types of circumstances often lead to significant trading account losses, so it is unquestionably preferable to initiate trade management techniques that limit these negative practices. Active traders will typically adopt an approach that allows for strategies to be used repeatedly over time. For these reasons, each trader’s ability to set risk parameters in a consistent fashion is what ultimately determines profitability performances for investors in most cases.

Protective Approaches Can Limit Losses

Traders that are looking for ways to establish favorable risk parameters often use technical analysis strategies as a way of identifying specific price levels. Additionally, traders can set personal rules for the level of risk exposure that is present in each trade. For example, conservative traders might choose to limit the potential for losses in any given situation to 2% of the total account size. These practices create a substantial layer of protection for investors because it is essentially impossible for any trading account to fall to zero, as long as the trading broker is able to guarantee the execution of stop-loss orders.

Of course, not all trading brokers are willing to offer guaranteed stop-loss placements. However, there are still many favorable options that are available if guaranteed stop-loss execution is viewed as an important issue or even a self-imposed prerequisite for anyone trading with active positions in the market. For these reasons, every trader should read several different broker reviews in order to get a sense of what is being offered and which trading services are guaranteed. Securing an effective charting station is another element that active traders should consider because technical analysis strategies often define the price levels that are used for stop-loss placements and profit target orders.

Having a strong technical analysis platform is rarely thought of as a strict prerequisite for all trading styles. However, trade order placements can be much more difficult to conceptualize when fundamental analysis techniques are used and this is primarily due to the fact that price levels are much less specific when fundamental analysis works as the preferred trading strategy. Risk management techniques that produce the best results will typically draw from a variety of financial disciplines, so traders that hope to achieve minimal trading losses can often benefit from reading strategy tutorials from several market experts as a way of receiving the most balanced opinions on the topic.