Investment planning is almost impossible without a thorough understanding of risk. There is a risk/return trade-off. That is, the greater risk accepted, the greater must be the potential return as reward for committing one’s funds to an uncertain outcome. Generally, as the level of risk rises, the rate of return should also rise, and vice versa.
By combining the investment information and trading tips below, you will virtually eliminate any risks of losing all your trading capital and should be able to make excellent profits from trading:
1. Follow the 2% Rule
Never risk more than 2% of your trading capital on a single trade. Smaller accounts between $5,000 and $10,000 may have to go slightly higher.
2. Stop Loss Orders are Your Friend
Always use Stop Loss Orders to protect capital whenever you make a trade, and move them to protect profits. Most traders don’t really use stops properly. Anyone who trades with a tight stop will be stopped out in a normal market retracement. Stops should be placed at least 2 standard deviations from where the market is. They should also be placed using a higher time frame.If you trade using daily data, look at weekly data to place your stop. Stops should not be moved when the market gets close them. Too many traders place stops then don’t want to take a loss and keep moving their stops as the market gets closer. Stops should also be used in order to not let a winning position get away from you. In a trending market they should be moved with the trend, this will eventually lock in some profits. Even if you don’t like to place stops, you should have a predetermined point at which you’ll get out of the market, stops help you do this.
3. Never Over Trade
Many traders over trade with undercapitalized accounts. Traders often try to carry too big a position relative to their available capital, and trade too frequently for the size of the account.
4. Protect Your Profits
Never let a profit run into a loss. As soon as a trade becomes profitable, move your stop loss to lock in profits.
5. Cut Your Losers
Many traders can’t (or don’t) take the small losses and admit they are wrong. They often stick with a small loser until it really hurts, then take the loss.
6. Follow the Trends
Always go with the trend, unless you are positive it is over. Trading against the trend is a common mistake, especially without reasonable stops.
7. “When in Doubt, Get Out”
If you are unsure of the market position, it is safest to exit with a guaranteed profit or small loss.
8. Volume is Needed
Avoid stagnant and volatile markets and trade in markets that are trending with a daily volume of at least 100,000 plus. These markets will result in bad fills, limit moves and erratic price movements usually against your position, which results in your stops being blown through.
How many times have you heard this? You must diversify your investments and portfolio. Trade in a variety of different markets to spread risk.
10. Create a Surplus Account
This is one of the most important tips. When you have made some profits, place them here to use only in an emergency.
Do you have any other personal tips to help other investors eliminate risk? Leave a comment below!
10 Tips to Eliminate Risks,