SMART Risk Management Methods For Active Traders

By David S. Chang

Losing Money in the Stock Market

There are many ways to achieve financial independence without necessarily increasing our workloads. In this age of the side hustle, we can earn from social media accounts, general web browsing, and, of course, good old stock trading. 

While you may assume that only high-flying wall street brokers stand any chance at finding success with that latter point, there are now countless American investors who work day jobs or let a broker manage the majority of their trade options for them. 

That’s all well and good, but the risk of loss alone may still see you steering clear of the stock market. While other side hustles focus on earning from a relatively small output, trading is an entirely different beast. Worse, it’s a beast on which you could lose your whole savings.

In reality, there are plenty of steps you can take to at least reduce those risks. Finding a verified broker is, of course, your first step to success. Then, you should consider the following risk management methods that can help.


Diversify

via GIPHY

They say not to put all your eggs in one basket, and never is that more the case than where investments are concerned. As any decent broker will tell you, one bulk investment is rarely a good idea.

Instead, you’re far better off diversifying your investment portfolio with small amounts scattered over a range of different stocks across different industries. Take this benefit even further by also considering diversification across markets, geographies, and so on. Ultimately, the more varied your investments, the less chance any disaster has of costing everything. And, that’s a risk-avoidance technique always worth taking. 


The 1% rule

The 1% rule is common among day traders, and it could be a massive help for your risk avoidance efforts, too. With this technique, traders focus on never placing more than 1% of their trade portfolio capital on one investment. 

Obviously, this still leaves big-time traders plenty to play with, but that amount will be much lower for you. If your portfolio/savings are currently at $10,000, for instance, you’ll never place more than $100 at any given time. 

It’s a simple concept, and it doesn’t take a genius to work out why it reduces risks. This, paired with your efforts towards diversification, means you’ll never lose a great deal. Of course, it does impact your earning capabilities on each trade too, but that’s a risk worth taking. Besides, if you’re investing diversely, you could still earn plenty across the board. 


Set a Stop-Loss

Even on seemingly sound markets, losses can hit with no notice. Just look at the 2007 financial crisis, which took even big-time traders and companies by surprise. If they’re at risk, then you are, too. That’s why it’s imperative that you also set a stop-loss. 

In layman’s terms, this means you set a rate at which you’ll sell your stock on once you stumble into losses. This is a get-out card if you like. While it isn’t ideal, it at least stops you from facing insane losses as markets continue to plummet. After all, a small loss is often liable to escalate in this industry. 

Your stop-loss point can be whatever you feel comfortable with, so think hard about this. While it isn’t pleasant considering taking a loss at all, you can bet you’ll be glad you did if the worst happens. 


Buy a Protective Put

A protective put, also known as a downside put option, gives you the right to sell the underlying stock at a set price before that option expires. While this does mean spending a little more upfront, it’s a guarantee, if you like, that you can always leave a trade untarnished.

Like a stop-loss, that ensures you can sleep easy at night, even if your trades aren’t necessarily going your way. It also means that you can reduce your losses somewhat if you notice a downturn in the market with time to spare.


Conclusion

There may be no such thing as a risk-free investment, but that doesn’t mean your hands are tied here. These relatively basic concepts alone can see you investing smartly at long last. And, all with the peace of mind that you were worried about losing!

David S. Chang

Award-Winning Entrepreneur, Wealth Manager and CEO | Chief Editor, Author, Keynote Speaker, Consultant ArtofThinkingSmart.com | Political Consultant | Army Officer National Guard | Living To Fulfill Needs, Solve Problems, and Live Passionately!

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