The Risk Pyramid
Here’s the risk pyramid showing you how risky is whatever you’re doing. Once you identify where you fit in the above then you can make a sub-pyramid of that particular thing and so on. Needless to say, the safest is at the bottom and the riskiest is at the top of the pyramid.
Key factors to keep in mind while selecting an investment/trading instrument are:
- Time Horizon
- Risk/Reward factor
The Bottom Line
Not every investor is created equally. whereas others like less risk, some investors like an even additional risk than those who have deeper pockets. This diversity ends up in the sweetness of the investment pyramid. The pyramid representing your portfolio ought to be custom to your risk preference.
It is necessary for investors to grasp the thought of risk and the way it applies to them. Creating knowledgeable investment choices entails not solely researching individual securities however conjointly understanding your finances and risk taking capacity. To induce an estimate of the securities suitable for some levels of risk taking capacity & to maximize returns, investors ought to have a thought of what proportion time and cash they need to take a position and therefore the returns they’re seeking.
Probability and Risk Reward Ratio
For traders like you and me, stocks are nothing but electronic symbols. I only use volatility and liquidity to choose what stocks I trade. I will talk about why we need volatility and liquidity in the future. They are very easy to understand. The focus of today’s topic is Probability and Risk Reward Ratio (R-R-R). These two elements are a very crucial part of our trading career.
First, let me use a simple game to illustrate what probability is in trading. We all know that the probability of an outcome of flipping a coin is 50%. If you bet a rupee on the head and I bet a rupee on the tail. No matter how many times we play the game, we would break even in the end since the probability is 50%. Neither of us has an edge over the other. However, if you somehow increase your probability to 51%, you would beat me in the end. That is how casinos make money. Most people who go to casinos lose eventually. The house is always a winner since the odds are in the house’s favor. That is a probability.
Now let’s change the rules of the game. If you win, you make 2 dollars and if you lose, you lose 1 dollar. In other words, you risk a dollar to make 2 dollars. As for me, the rules are still the same. I risk one dollar to make one dollar. Your R-R-R becomes 1:2. Mine is 1:1. Probability is still 50%. It is not hard to see you will take all my money quickly. That is risk-reward-ratio.
Trading is not a zero-sum game since you will have to pay commissions to your broker. Even if your probability is 50% and Risk Reward ratio is 1:1, you’d still lose. So trading is a little bit harder than flipping a coin. Now it is quite obvious what we need to improve here. If you can prove that the accuracy of your system is over 55 percent no matter how the market behaves and your Risk Reward ratio is 1:1, then what a brain surgeon makes would seem like peanuts to you. It seems easy to trade with a Risk Reward Ratio of 1:1 since you really do not have to wait for a stock to move that much. However, the accuracy of your system is what you need to work on and it is extremely hard. Continue reading “Probability and risk reward in trading”
How to keep stop loss (SL)?
We already know that the importance of using a stop loss order can not be stressed enough. However, here are a few questions for us to think over
- When do I set a stop loss?
- Should I use a soft (mental) stop loss or a hard stop loss?
- Where do I keep stop loss?
- What am I supposed to do if my position flips on a penny?
- When do I keep stop loss?
SL point should be well planned before you enter a trade and placed right after your entry. You should already know where your entry point is before you open a trade. If you are still trading as it goes, you are not ready yet. In other words, you should NOT trade randomly. Every entry, SL, and exit should be well planned in advance.
Should I use a soft (mental) stop loss or a hard stop loss?
All smaller players (less than 1 Million trading capital) should use hard SL provided they trade liquid stocks. The mental SL is for 2 kinds of traders. One is extremely sophisticated traders. This group of people is the killers of all killers. The other is beginning traders who just want some excuses for not using stop losses. Continue reading “How to keep stop loss and trade well”
Importance of Risk Management in trade
The primary goal to invest/trade in the stock markets is to make money. However, we will never achieve this goal if we do not know why and how to manage risk. Expert Traders are nothing but Risk Management experts.
Why risk management has top priority
In trading, risk management is far more important than anything else. To make money, we need a trading stake. How could we make money if our trading accounts are wiped out or our capital is tied in some rotting positions? It is absolutely OK to have losers. But it is NOT OK to hold onto them once Mr. Market has warned us to get out. Here is a post about how to set stop loss orders.
How to control your risk
Continue reading “Risk Management in trade is must”
WHY YOU NEED TO HAVE A TRADING LOG OR DIARY?
If you are not measuring it, Then you are not improving it
Usually, traders keep jumping from one method to another (I also did at the start)…
* One indicator after another
* One book after another
* One mentor after another
* One seminar after another
* One forum after another.
This is the infamous “search for the Holy Grail.”
Sorry, doesn’t exist.
Okay, we’ve all heard that the psychological aspect of trading is the key to success. But HOW do you tap into it?
There’s only one way I know.
Through the hard work and the daily drudgery of keeping a trading log of every trade you take.
By recording, and reviewing every trade you take (along with the ones you didn’t take, but should have), you’ll learn more than from any book, seminar or video.
This feedback mechanism is the key to success.
Like all subjects of Master: Continue reading “Why keep Trading log”