Kavan Choksi / カヴァン・チョクシ Discusses a Few Risk Management Techniques That Can Help Active Traders

Risk management is important for cutting down losses. It can help protect traders’ accounts from losing all of the funds. Kavan Choksi / カヴァン・チョクシ mentions that if the risk is managed properly, traders would be able to open themselves up to making money in the market, without constantly worrying about losses. Risk management is an imperative aspect of active trading. After all, a trader who has generated substantial profits may lose it all in just one or two bad trades unless they have a proper risk management strategy.

Kavan Choksi / カヴァン・チョクシ talks about risk management techniques followed by active traders

Planning ahead can often mean the difference between success and failure. Hence, before engaging in active trading, one needs to have a proper plan in place. Stop-loss (S/L) and take-profit (T/P) points tend to represent two major ways in which traders can plan ahead when trading. Traders who are experienced and successful know exactly what price they are willing to pay and at what price they are willing to sell.  These active traders subsequently measure the resulting returns against the probability of the stock hitting its goals. In case the adjusted return is high enough, they end up executing the trade.

Newbie traders are prone to entering a trade without having any idea of the points at which they will sell at a profit or a loss. Much like gamblers, they can get lucky or unlucky in the market. While experienced traders depend on plans, newbies allow emotions to dictate their trades, which increases the risk of losses. Losses may even provoke people to hold on and hope to make their money back, while on the other hand, can entice traders to imprudently hold on for even more gains.

A lot of day traders adhere to the one-percent rule, which advises that no more than 1% of one’s capital or trading account should be invested in a single trade. For instance, with a $10,000 trading account, each position should be limited to $100. This approach is prevalent among traders with accounts under $100,000, although some may go up to 2% if their finances allow. Traders with larger accounts often prefer using an even smaller percentage. As account size grows, so does the risk per position. To manage losses effectively, it is recommended to keep this rule below 2%, as exceeding this threshold would expose a significant portion of the trading account to risk.

Kavan Choksi / カヴァン・チョクシ mentions that stop-loss point is the price at which a trader shall sell a stock and take a loss on the trade. This typically occurs in a situation when a trade does not pan out the way a trader hoped. These points are designed to help active traders to avoid the “it will come back” mentality and limit losses before they escalate. For instance, in case a stock breaks below a key support level, traders typically sell as soon as possible. A take-profit point, on the other hand, is the price at which a trader will sell a stock and take a profit on the trade. Such a situation is prevalent when the additional upside is limited given the risks. For instance, in case a stock is approaching a key resistance level after a large move upward, traders might want to sell it off before a period of consolidation takes place.

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