Understanding risks and returns in financial markets

Do you know what is your Risks and Returns in Financial Markets

Risks and Returns

Risks and Returns are the two of the most fundamental concept in the financial domain. All investment decisions are made around these two figures and the relationship between them. Thus a good understanding of the risks and returns of any financial product is of utmost importance before we invest in it.

Investment return: Return is the extra money an individual earns for investing his money in a given financial product. Return is generally specified as an annual rate.

Investment risk: Risk is defined as the changeability of profits and the shot that your venture will return short of what you expect or your speculation makes a misfortune abandoning you with less capital than when you started.

Let’s consider a simple case of fixed deposit. If I deposit 10000 rupees today for 1 year and the interest rate that the bank offers is 10% annually. So at the Continue reading “Understanding risks and returns in financial markets”

The Risk Pyramid

The Risk Pyramid

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
  • Capital 
  • 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 in trading

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 and trade well

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
keep Stop loss

  • 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”

Risk Management in trade is must

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 keep Trading log

If you are not measuring it, Then you are not improving it

Trading log

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”

simple Stop-loss strategy

A simple Stop-loss strategy

Everybody knows and use it but only a few people know how to keep a good stop-loss.

Few questions for you.

  • Have you been at a loss due to Stop-loss? You wondered what’s a decent stop loss level.
  • Ever been bitten by a stop loss that simply triggered before the stock soared to the degree you expected at first, going away you high & dry, and tally your losses?
  • Does the triggering of stop-loss alter your purpose of the trade from optimistic to pessimistic or vice versa?

If your answers are YES, then you are not alone. A majority of the traders within the stock markets can have an identical story to inform you concerning the victims of the stop loss.

If you retain too tight stop losses, then you book too several tiny losses. If you retain massive stop losses, then you tend to book massive losses anytime a stop loss is triggered. Either way, you are the loser whenever such a stop loss gets triggered. It becomes a mystery and trader says “ Ab Mein Kya Karun”

So why do traders and analysts offer such a lot importance to a stop loss?

I have a solution for you. Learn how to use a stop-loss to run your profits and cut your losses for maximum profits!.

The important point to remember while taking trades:

Risk reward ratio 1: 3

Firstly, look for Low-risk high reward trades. Your risk should not be more than your targets, Preferably risk reward ratio should be Risk reward ratio 1: 3. For 3 rupee profit, you can not risk more than 1 rupee.

Strategy: Defensive Stop-loss  ( Minimizing risk, maximizing gains )

It is a very simple and straightforward way to do a trade. Continue reading “simple Stop-loss strategy”