Become Successful Trader: Friends, most of the new people start with trading instead of investing in the stock market and they also start trending with high risk segments like futures and options. If you trade without basic knowledge of the stock market, then the chances of loss will also be high. You must have heard from a friend or a YouTuber that 95% people lose money in trading, only 5% people make profit. This is absolutely correct.
By trading in the stock market, you can earn a whole year’s income in a single day and vice versa, you can also lose a whole year’s income in a single day. But remember here only 5% of the people are winners and the rest 95% are all losers. I am neither instigating nor intimidating you to trade here. Just telling facts.
Till now there is no such trading formula which can completely avoid losses. There is only one way to avoid loss in trading – that is by not trading. We can reduce the loss in our trading through risk management and become a profitable trader. Many people do not know the risk management and some people do know but they are not able to follow it strictly due to which they have to suffer heavy losses. Successful traders know this and follow it strictly.
Why is risk management important in trading?
What is Risk Management in Trading?
If one earns money in the stock market, the other is losing. But mostly the number of money earners is less and the number of losers is more. Here only those people are earning money who strictly follow the risk management. Risk management is not rocket science nor is it a jackpot formula that will make you rich overnight. It is a self made rule which has to be followed by itself. Means a rule made to keep yourself under control.
Here in risk management, risk refers to the possibility of losing money and management refers to using your capital efficiently. Thus, risk management in the stock market means how to use your capital efficiently and how to avoid drowning it.
Let’s understand it with an example like- If you have 1 lakh rupees in your trading account, then it should be divided into three equal parts i.e. 33-33 thousand rupees. Now you have to take 2% risk on 33 thousand rupees in a day and follow it strictly. That is, you can take a risk of about 650 rupees in a day.
Suppose you have earned Rs 800 in the first trade today, then again 800+650= Rs 1450 do not risk at all and do not risk the entire profit i.e. Rs 800. Now your risk should be half of the profit i.e. Rs 400 and till the end of the trading you should keep the profit of Rs 400, only then you will be able to become a successful trader.
Now if there is a profit of Rs.400 in the second trade also, then take a risk of only Rs.200 for the third trade and if it goes into loss, then the total profit is Rs.800+200=1000.
Now if you take the trade the next day, take half of your profit of Rs 1000 i.e. Rs 500 risk. Definitely book half the profit. If there is a continuous profit or loss in the trade twice, then we should close our trading terminal on that day. Because over trading is more likely to result in losses by the end of the day. In this way, your capital should be traded in a managed manner, this is risk management.
What is the total number of trades per day?
The minimum number of trades we should take in a day. Although there may be difference of opinion on the number of trades to be taken, but in my own understanding 3 or 4 trades in a day is sufficient. Because the more trades you take, the more brokerage you will have to pay, the effect of which starts showing on your P&L. So the lower the number of trades, the better.
How much risk should be taken per day?
Everyone has different risk appetite in the market. Maximum risk of 3% to 4% per day is considered good in trading. If you take more risk than this, then soon your trading account balance may appear zero.
The risk/reward ratio is the ratio of the total loss or risk to the total profit or reward in a trade. For example, a trader wants to risk Rs 500 and reward Rs 1000 in his trading setup, thus the Risk:Reward ratio = 1:2. Similarly, if you want a risk of Rs 1000 and a reward of Rs 3000, then the Risk:Reward ratio will be = 1:3. Most traders prefer to keep their risk:reward ratio to 1:3 ie if each trade or each day can make a loss of 5% or a profit of 15%. This is a tried and tested ratio. You can also keep it 1:2 or 1:4 according to you. We should try to minimize the risk and maximize the reward in every trade.
The win/loss ratio is the ratio of the total number of winning trades to the total number of losing trades. Suppose a trader has 25 trades in a month with 10 winners and 15 losses, then the win/loss ratio or win/loss ratio = 10:15 or 2:3 i.e. 2/ 5*100 = 40% of trades will be winning. It helps the trader to build money management. However how many trades will be winners or losers in the month? There’s no guarantee, but there’s a hope. Also cannot be sure which 40% trades will be winners.
Consider a trading system, such as-
How much risk should I take in trading?
As you can see the answer to this question is not simple and straight forward. It depends on many factors, such as-
• Total number of trades
• Win/Loss Ratio
• Risk/Reward Ratio
• Percentage at risk on each trade
In general, keep the total number of trades to a minimum, so that the brokerage is also less. The loss should be the least in the win/loss ratio, although we cannot determine that. A risk/reward ratio of 1:3 or 1:4 can be a suitable ratio. Do not keep the percentage risk on each trade more than 3%.
In the end,
If you are just starting to trade, it would be wise to risk only a small amount of your capital until you develop your skills and confidence. Most professional traders risk no more than 2% or 3% of their capital on a single trade. Successful trading can be done with a combination of technical analysis, indicators, chart patterns, candlesticks, money management and trading psychology along with risk management.
Disclaimer: Trading in the stock market is subject to risk, for this you must take advice from your financial advisor or do the trading yourself by taking risk and analysis.
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