Understanding Stock Trading Risk Management

Being involved with stock trading and investing requires a good understanding of "Stock Trading Risk Management" to be successful.

Without any guidelines or procedures in place to help manage risk, you are just gambling.

It's true that some Gamblers come out winners, but the decision to get involved in stock trading should not be based on a desire to gamble.

If you want to gamble, you will have a lot more fun going to Las Vegas or your local High Class Casino.

The concept of Stock Trading Risk Management consists of learning about many things to help manage risk as well as good "Money Management".

Below are some of the things you should learn about, including but not limited to:

  • Setting Protective Stops Using Elliott Wave
  • Trading Expectancy and Being Right
    Learning about trading expectancy and how being right is not the same as making money, is a key concept to understand to help get you on your way to being a successful trader.
  • Trader Self Evaluation Part One
    Understanding Trader Self Evaluation will help you figure out areas to concentrate on that may help you become a successful trader. This article provides some insight into how to get started.
  • Trader Self Evaluation Part Two
    The second article in a series in helping you understand yourself to become a better trader.
  • Position Sizing
  • Position Sizing Tips
  • Advanced Order Types
    Having an understanding of the various Advanced Order Types available to you can help you manage risk while stock trading.
    • Using a Limit Order to Sell - Closing out a long position
    • Stop Loss Orders
      Finding out how a Stop Loss Order works is critical to being successful in stock trading. Read about how using this risk management technique can help in your overall stock trading plan.
    • Adjusting a Stop Loss Order to Maximize Gains: An article on adjusting a stop loss to maximize gains in extreme intraday market conditions.
    • Buy Stop Order
      A Buy Stop Order actually has several uses, although you'll often find that most people only explain one of them. Find out about an additional use that is often overlooked.
    • Buy Limit Order
      Using a Buy Limit Order when stock trading can help minimize the chances of your order being filled at a higher price than expected.
    • Sell Stop Order
      A Sell Stop Order is often mentioned to help minimize losses on an existing position. If you look a little further, you'll see it has other uses as well.
    • Trailing Stop Orders
      Learn how using a Trailing Stop loss order can help you manage risk by offering some protection against losses and for keeping profits.
    • Trailing Stop Loss Order Examples
      Learning how a trailing stop loss order works and can help minimize losses as well as help you lock in profits. This section provides some details and examples of using one for short term scalping or day trading.
    • Contingent Orders
      A Contingent Order is an advanced order type that can be used as a risk management tool while stock trading. Here I have an overview and an example to help you understand the benefits of using one.
    • Bracket Order
      Using a Bracket Order can help automate trade management and take some of the emotion out of your trading. It's another stock trading risk management tool available as a trader or investor. Let's take a look at an example stock trade.
    • Using a Bracket Order When Shorting
      Using a Bracket Order when shorting a stock can help automate trade management and take some of the emotion out of your trading. It's another useful stock trading risk management tool. Here's an example stock trade.
    • Stock Stop Loss
      An additional introductory article I wrote on this topic with another brief example of it's importance.
    • At the Open Order
    • At the Close Order
  • Cutting Your Losses Short
    Cutting losses short is one of the most important rules for successful stock trading. Used as part of a good risk/money management plan, this concept could very well make the difference between success and failure.
  • Cut Losses Short - Trader Psychology
    Learning to cut losses short is a must learn concept to become a profitable stock trader over the long term. Trader Psychology is an important component that needs to be mastered in order to consistently make exiting these losing trades possible.
  • Risk and Reward Ratio
  • Identifying Good Entry Points
  • Having an Exit Strategy in Place
    This article will be a brief introduction as to why having an exit strategy in place is so important. More specifically, having one in place prior to entering any trades.
  • Portfolio Diversification
    Using portfolio diversification as a stock trading risk management tool can help avoid catastrophic losses that are related to a specific sector or industry.
  • Stop Loss and Options
    Can I use a Stop Loss and Options? If you've ever lost your entire value invested in an Options position, you may be wondering the same thing.
  • Develop A Trading Plan And Stick To It!
  • Battery Backup and Surge Protection For Traders: That's right, prepare for the worst case scenarios and take complete risk control in your own power (pun intended...)
  • Market Panic Planning for Intraday Traders
  • Missing Out On Potentially Profitable Trades
  • Risks of Holding Low Quality Stocks Overnight
  • Performing Research to Help Prevent Unrecoverable Losses

One of the biggest faults I've seen with long term investing portfolios is that a long term investor has in their mind that if you buy a stock and hold it long enough, it will go higher. Even when the stock is going down in price, they, and the media, say that the stock is cheap now and will go up again.

What about long term investors who bought AIG, Lehman Brothers, General Motors, Ford, Countrywide Financial, Bear Stearns...... I could go on for a while. Long Term investing does not mean that you don't need a trading plan with risk management rules and procedures in place. What are you going to do, ride the stock all the way down to zero and hope it goes back up?

Hope has no place in stock trading nor investing. Hope is an emotion that will cause you to lose your investment assets real quick.

By having a simple "Trailing Stop Order" in place, long term investors would be utilizing some sort of stock trading risk management and would greatly reduce the odds of a catastrophic loss. Hopefully long term investors who held positions in any stocks like the ones I mentioned above, at least used proper position sizing.




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