Trading in the stock market is one of the most sought income generation method adopted for leading a good lifestyle. Stock market trading is very lucrative but at the same time it involves higher amounts of risks.
The nature of the stock market trading is unpredictable in terms of the risks involved and benefits earned. No trader can ever be 100% sure that the trade is risk free. Nonetheless, if there is full-proof risk management strategy ready and if you adhere to it with utmost discipline, then it is possible to manage the risks associated with stock trading in SGX market.
What is Risk Management?
As the name suggests risk management is a way of not keeping all your eggs in one basket. In simple words risk management in stock trading refers to the way of managing risks associated or involved while trading stocks in SGX market. Stock trading is a high-risk high-return game. Every trader who is involved in stock trading needs to adopt a well-framed risk management strategy while carrying out trade in SGX market.
Having a risk management strategy is important because in its absence one can make mistakes that would cost losses to their trading accounts.
The following article will point out 5 most important risk management strategies that will help the investors and traders in mitigating the risk associated with stock trading in SGX market.
1. No “Stop-loss” order
For many new investors and traders not putting a “stop-loss” order on their trade account is one of the biggest mistakes that cost them losses on their trading account. Stop-loss is a type of order that restricts the investment by automatically stopping the trading in SGX market by closing the trading position once the account trade hits preset loss level set by the investor or trader. Thus the stop-loss order prevents the loss but often it is observed that traders and investors forget to set the stop-loss order.
|Stop-Loss Order Feature||What it Does|
|Stop-Loss||This is the most primary type of order where the trading stops when the market fluctuates against your trade.|
|Guaranteed Stop||Under this type of order there will be a guaranteed stop of trading in the account at the pre-determined price specified by the investor.|
|Trailing Stop||Under the trailing stop feature of stop loss the investor has to set the trailing stop price. This price shall move in sync with the profits earned in the trade and if the market movement turns negative against the trade then the trade shall stop at the new trailing stop. This feature of stop-loss is beneficial as it does not require constant monitoring.|
2. Limit the trade risk
The basic golden rule of risk management while trading in SGX market is to limit your risks up to 1%. The 1% golden rule implies more specifically to a single trade. Trade experts suggest never to risk too much capital in a single trade as trading is a gamble and no one can be 100% sure about the market movement.
The implementation of 1% golden rule will help in mitigating the losses occurred in rouge trade. However, this is not a fixed rule as few traders and investors who have a higher risk appetite usually risk more capital in a trade.
Thus this rule can be used to understand the underlying principal that investing a huge amount of capital in a single trade can cost losses in the event of negative market fluctuation.
3. Trading is a skill, master it
Trading is an engaging activity and many traders and investors tend to lose the focus of trading. While most of the traders believe that trading is a way of making money but in reality a successful trade is the result of trading well with proper research and strategies.
In fact, it is always recommended that while trading focus towards mastering the skill of trading rather than making money. Thus if traders focus and master the skill of trading then they can expect higher returns and profits on their investments.
4. Define Goals
Every trader and investor has a different personality i.e. few have a low risk appetite while few have a considerably higher risk appetite, moreover every trader has different financial goals as few concentrate on fulfilling short-term financial goal while other have a longer time horizon.
Apart from financial goals and time-frame horizon every trader must also define the type of asset or instrument they wish to trade.
Thus, while trading it is very important for every investor and trader to understand one’s personality, financial goals, type of instrument to trade etc. as defining these parameters will help them in formulating better trading strategies.
5. Stay Updated
Trading is about staying ahead in the game and believe it or not being updated about the relevant NEWS is the best way ahead. The relevant news update helps to track down the movements of the market and the underlying asset. For example, demand and supply of particular underlying asset will have a huge impact on the price of the commodity and the movement of the market.
Thus it is important for every trader and investor to be in touch with the latest trends and relevant news about the market as it will help in understanding the impact on the prices and performance of the underlying assets.
The latest piece of news shall help in creating better trading strategies and in making informed and wise decisions.
The best and simplest way to stay updated and knowing the trending news across the globe is by reading newspapers, following market trends, the financial/market analysis provided by leading brokers, carrying out research based on historical data etc. These means and ways shall surely help in becoming a successful trader.
Lastly, creating a risk management strategy is a good habit and having one will surely help a long way in carrying out successful trade activities. A good amalgamation of risk management habits and trading strategies is a sure shot formula for a successful trading career in SGX market.