However, the quality of your investments can fluctuate on a daily basis. If you’re interested in becoming active in the stock market, it’s important to develop a risk management strategy, which is crucial for online trading. An effective risk management strategy can help protect you from big losses by setting limits. If you don’t already have a broker, no worries; you can also search and find recommended online brokers such as easyMarkets, which offers risk management tools such as free guaranteed stop loss to help you better manage your trading.
Decide what an acceptable loss is
Your first step – long before you move money out of your online broker trading account – is to set your loss limit. Some day traders struggle to set and stick to loss limits. They follow their emotions and expose their account to too much risk, then suffer for it.
Make the smart choice and commit to following statistics, trends, and probability. These concrete concepts ensure that your losses are manageable. There are two proportions common in day trading, known as the risk-to-reward ratio and the one-percent rule.
Ratio of risk to reward
Determining the ratio of risk to reward you can comfortably accept is crucial. Losses are inevitable in trading, but they shouldn’t gut your account. An incredibly high-risk opportunity is a gamble, and few people are actually in a position to accept that risk.
Instead, seek out stocks with lower risk potential. The typical risk ratio is 1:2. This means that if you invest $100, you should be prepared to lose double – in this case, a $200 loss.
The one-percent rule
One of the most popular forms of risk management is called the one-percent rule. It’s not a complete strategy on its own, but it does offer greater points of guidance.
To use the strategy, never invest more than 1% of your account balance on a single trade or type of stock. If you have $10,000 in your trading account, you don’t spend more than $100 on any one kind of trade. You can still spend all the money in your account, but this way you don’t have too many eggs in one basket.
Know when to quit
When you start benefiting from day trading, it can be hard to sell your shares. But at some point, your investments will take a down-turn. This is why risk management also involves identifying the right price point to withdraw your investment.
Support and resistance
There are a handful of ways to find the ideal stopping point. Support and resistance may be a basic strategy, but it’s effective. This relies on long-term trends.
A graph of stock values shows the highest price point a share may reach before it starts falling again. Set the average high as the point when you withdraw investments for maximum benefit and minimal risk.
By following a handful of strategies like these, you too can benefit from day trading. Stick to your limits and watch the value of your shares grow.