The Importance of Risk Management

Risk Management - what is it and why do we need to consider it? Risk Management is the ability to handle or manage the risk that you are exposed to in a particular trade. Risk Management is important in trading in order to protect your money or your capital because no one exactly knows for certain what the market will do once you are in a trade. We can only try and tell based on certain analysis and trends what we think will happen to a particular stock, but no one out there (not even the market makers) is certain that a stock will go to the direction that you would trade as or told to trade. Thus, it is only fair that we need to look after our cash and make sure that if things don't go on our favour, we will not have lost everything in our trading account.

Risk Management also involves identifying how much you are willing to risk for a particular trade. For example, if you have $10,000 in your bank account, you might only want to risk 20% of this amount at a time. Thus, when you trade, you may only get into a trading position that will only let you lose a maximum of $2,000. In other words, you are comfortable enough to lose this amount, should the trade go against you.

Another aspect of risk management involves looking at a risk-reward ratio for a particular trade. This basically means that you look at how much you are risking in proportion to the reward or potential profit that you will make out of a trade. For example, if a trade is only able to generate $1,000 in profit, and you are risking $10,000, this may not necessarily be a good risk-reward ratio as compared to a trade with $1,000 potential profit and a risk of $4,000.

Prudent risk management is part and parcel of trading, whether it be stocks, options, futures contracts or indices. When I trade using Planet Wealth's recommendations, I always work out how much I'm willing to put into the trade. I never put all of my money into one trade, and before I enter on a trade, I also think if I'm prepared to lose x amount of dollars, should it go against me. More importantly, I also look at the risk-reward ratio that is not less than 20%, and this means that my trades will only let me risk less for more profit.

One good thing about the range of strategies that Planet Wealth offers is the various levels of risk that each strategy entails. This helps their clients decide if it meets their risk management criteria, and if they are also feasible for certain market conditions. This is especially crucial for times like what are experiencing now, where the market is very volatile and tends to go on a downward trend. Planet Wealth has strategies to cater for a downward trend, and also ensures that the level of risk is minimised as much as possible.

In summary, risk management is a very important factor for trading in order to protect your money and allow you to profit in the markets in the long term. Whether you trade stocks/shares, options, futures contracts, currencies or indices, make sure that this is at the top of your list.

Another sharemarket secret unveiled. To the many trading successes.