Why Proper Risk Management Strategies Matter in Today’s Markets – Introduction
By most measures, we are in one of the best periods in history. In the developed countries, fewer people are unemployed, inflation has been contained, wages are rising, and the general confidence among the residents is rising. Businesses are reporting record profits and in the emerging markets, there are hopes that their economies will come along. In addition, the price of crude oil is likely to continue falling after the decision by OPEC to boost production.
All this is a good thing for the world and for investors. However, there are concerns that things could turn around. Moreover, in all the previous market crashes have followed a period of increased boom. There are concerns about a trade war, an inverting yield curve, and the threats of increased populism.
Therefore, this has led to calls of increased risk management strategies among traders. This is because in any given day, there is a likelihood that the yield could invert which would bring all things down. In risk management, this involves a few things which will go a long way in protecting your account.
First, it involves the size of the transactions or trades that you initiate. In all trades, you should always ensure that you risk only a small portion of your account. In other words, you should risk a slight portion of your account in all trades that you do. The benefit of doing all this is to ensure that you lose only a small amount of money if all things fail. For example, if you have an account with $10,000, you should not risk more than $500 per trade. In fact, you should always risk less than $200 per trade. Doing this will help you lose the amount of money you can lose comfortably. If you have this account, it means that losing just $200 will not be very heartbreaking.
Second, you should always strive to ensure that all your trades are protected. This is a very important thing for you because anything can happen even when you least expected it. A good example of this happened early this year when stocks crashed after the VIX jumped. There are a number of ways you can protect your trades. First, you should always use a stop loss. This should be a well-calculated level where you are prepared to take the most losses. You should set the stop loss immediately you initiate a trade. Doing this will help you be protected in case anything happens.
You should also consider using a trailing stop loss. A sell trailing stop loss order usually places a stop price at a fixed amount which is usually below the market price. Therefore, as the price rises, the stop loss goes up by the trail amount. If the price of the asset moves lower, the stop price does not change. The market order is then submitted when the stop price is reached. This is a very important method you can use to protect your account.
Finally, you should always do your research before you initiate a trade. This research should be backed by technical and fundamental analysis. The fundamental analysis should tell you all the intrinsic factors that could happen. On the other hand, the technical indicators should tell you the levels where the asset could reach.