Losses are typically considered as part of any trading or investing initiative. Even successful investors have suffered significant losses that took a huge chunk away from their portfolios. However, the important part is to learn from successful investors how they modified their approach after their loss.
And so, as a retail investor, the first step you need to take is to establish a clear-cut risk management strategy that can help you avoid significant losses. Let’s look at key measures you can take to mitigate the risks associated with trading and investing in the stock market.
Employ stop-loss orders
One of the quintessential grand strategies when trading on the stock market is to use stop-loss orders. “Let your profits run, but limit your losses.” You may want to adhere to this piece of advice when investing and speculating in the share market. Your stop-loss order becomes a ready tool that can limit your stock market loss exponentially. There are three crucial factors to consider when using stop-loss orders. They are:
1. Find out when to place a stop-loss order
2. Understand how long it needs to be in effect
3. How far to place the stop-loss order from the market price
Use trailing stops
As a form of stop-loss order, a trailing-stop essentially tracks the stock price when the stock price is winding upward. The trailing-stop comes into effect when the stock reverses and falls and reaches the most recent level. If the stock hits the stop-loss price level, the trailing-stop converts it into a market order enabling the stock to be sold. This strategy ensures you can avoid further losses.
Be a cautious contrarian
If you’ve done your research well, you may want to go against the grain when market euphoria is going one way. An excellent way to avoid stock market loss is to take a tad step back away from a market-high that’s overdue to end. Perhaps you may miss a bit of an upside, but you could still pocket a nifty profit by selling.
Avoid high leverage
In the world of stock trading, higher risk translates to a high reward. However, placing high leverages could result in more significant losses as well. For example, if you apply high leverage, you may be charged additional costs in terms of daily or overnight fees. While using leverage is essential, it is vital to use it cautiously and risk only the money you can afford to lose.
Diversify your investments
Don’t place all your eggs in one basket. When trading in the stock market, it can be risky, and hence you need to do everything in your power to minimize risks. Diversifying your investments is one way of mitigating risk. Investing across businesses, sectors, industries, market sizes and geographies can ensure that you allocate your money across the spectrum. This can allow you to profit from one industry if another sector is experiencing a down market.
Do not attempt to time the market
The stock market is a volatile arena. There is no guaranteed prediction on when it will be bullish or when it could crash. Hence, it is unwise to predict what can take place. Several investors aim to time the market and look for stock prices that can go in their favour. But doing so can miss out on profitable opportunities and sometimes even lead to ever stating losses. The length of time spent in the market is a more favourable option than timing the market.
Look into catalysts
Stock catalysts are critical nuggets of information that can impact stock prices or their movements. These catalysts can be any data, statistic, or information that can trigger a backlash in the market. Examples of catalysts include breaking news, business expansions, management changes, local and national events, earnings results, analysts’ recommendations or worldwide happenings. Typically, the effect of a catalyst may not last for a long time. But you can employ these catalysts to look into the right trading opportunity and avoid losing your money. For instance, if the price of a specific stock has dropped 20% suddenly, you could employ a small part of your available money to purchase additional shares. But remember to lock in your profit without letting your emotions take over you.
Don’t let panic control your decisions
New and seasoned investors alike tend to panic and sell as fast as possible when an event impacts the economy. But these emotional reactions may only cause you to lose money. Even if stocks fall drastically, it’s essential to stay focused, look forward and evaluate the situation. For instance, it could give you a rare chance to buy stocks at an affordable price.
Take calculated risks
The stock market offers several potentials to reap income, allowing value investors and traders with profound investment opportunities. But because the stock market is uncertain and volatile, it also holds a high degree of risk. Therefore, if you are unable to assume risks, trade cautiously. Trade and invest in line with your risk appetite and find a suitable asset allocation model that works for you.
Conclusion
When opening your demat account, choose a broker that caters to your objectives and matches your investment profile.
Disclaimer
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