Money management and the control of your risks are the two most important things that affect your overall performance in stock trading.
Are you surprised I said they’re the most important? Yeah, anybody can get in an uptrend and be fortunate to enter stock on a long uptrend.
You can even have ten trade wins consecutively and lose half of your profit in just one trade, says Techpally.
For example, if you choose your position sizes too large or if you do not limit losses, you can be a ‘good loser’
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How to Plan Trading
Greed and Fear are common feelings of traders during the over-bullish and over-bearish market respectively.
These are difficult to control and overcome than sticking to stock trading strategies or methods of trade.
To plan your trade well, you first need to determine what percentage of your assets you want to invest speculatively in stocks.
Then, determine how much capital you want to put in other less risk investment, we refer to this as diversification.
Depending on your risk appetite, you can, for example, invest 10% to 20% of your assets on the stock market.
There are various methods of limiting your risk for your assets invested in the stock exchange.
Methods to minimize Risk
- Risk per trade
Never risk more than 1% to 2% of your total portfolio value per position, Techpally boss advised.
Depending on your investment strategy and the time horizon, this rate can be a little higher, but never more than 5%).
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- Limit your loss with stop orders
Limit your losses! Closing losing positions in good time is one of the difficult things about trading on the stock exchange.
Once you have seen how price is falling in high percentage, you can stop your position, and you will be happy you do.
Always use stop-loss orders and keep them!
It is a common scenario for investors to shift their stop point as soon as the price gets near it.
This of course makes stop-loss orders completely pointless and you make a fool of yourself.
Of course, you should not set a stop loss too close to the current price, otherwise, you will be stopped out too often, and may miss a chance of reversal and win.
Set the stop order so that you are not immediately stopped even by a small countermovement.
Look in the chart for a suitable stop level that is not too obvious at the same time.
For example, stops are well placed a good bit below technical chart support lines.
- Set profit targets
Set a profit target in advance and close the position when that target is met, says Techpally.
For example, it is a good idea to use what is known as a bracket order when opening a new position.
As soon as the position has been established, a stop-loss and a take-profit order (profit limit) are effected directly.
If the stop is triggered, the take profit order is automatically deleted – and vice versa.
So you can take a position with confidence and even go on vacation without having to constantly check the trend.
Goals and risks are then defined so that only the market decides the result.
- Put stop in profit from Start
Don’t let a good paper profit turn into a loss.
As soon as you have reached a corresponding profit level with your position, you should increase the stop to your cost price.
In any case, you are protected against loss in this position.
However, do not be hasty here, otherwise, your stop can be triggered too early in the event of a small setback and the trade was then in vain.
As a rule of thumb: On the way to your profit target, two thirds to three quarters should already be covered before you set your stop on breakeven.
Variant: Trailing Stop
To have the stop automatically adjusted by the trading platform, you can use a trailing stop order.
For example, if you bought a share for $30, you can place a trailing stop order with a gap of $3.
The stop is then at $27. If the share rises to $32, the stop is automatically increased by $ 2, so it is $29 etc.
- Trading Stop in the event of large losses
If you have lost a pre-defined percentage of your assets, for example, 10% or 20%, then you should temporarily stop trading on the stock exchange and analyze what exactly led to these losses.
You should only plan a restart once you have precisely identified your mistakes and can thereby correct them.