Risk Management System In stock Market

What is Risk Management?

Risk management means cutting down your losses and managing your risk against your capital. In Mutual funds or stock market, both of them have risks. The difference is that one has low risk and another has high risk. As similar to risk both have higher rewards also.

Every professional trade has risk in the stock market and they know that how can they manage it well. If a trader does not manage her risk, then he or she can lose her all capital also.

The Basic Rule of stock market is minimum risk maximum profit. Suppose you are getting a profit of $100 in a week and losing $20 per day. So, ultimately you are in lose.

There are different strategies to manage risk. Every trader follows different ways according to their trade setup and trading ways. For example, if an intraday trader is trading then he knows that how much quantity should buy and how much will be her stop loss and target.

But we will study the basic strategy of risk management.

Key Points

• The basic strategy of risk management in share market & its 2 Important types
• What is Risk reward Ratio & Risk Per trade system
• What is stop loss & target and how to manage your capital with example

Basic Strategy of Risk Management

In stock market, there are many kinds of trading like intraday trading, option trading, swing trading, etc. But in every trading, the one thing which is common is capital means you can trade in any way the main thing is to grow your capital, not to lose your capital and this only risk management teaches us.

In this strategy, there are 2 important point

1. Risk Reward Ratio
2. Risk Per trade

Now,7 what is Risk Reward Ratio?

Risk reward Ratio means If a trader is planed that how much money he or she will be ready to lose to get a good amount of profit. Let understand in detail like in a coin there are two sides head and tail like that only in a trade there are two sides Profit or loss. If your analysis was right so you will get profit otherwise it will hit your stop loss.

Now, if you buy a stock let Wipro Price of RS 650 and your target should be around 670 and your stop loss will be around 640 so your Risk reward ratio will be 1:2. It means you are ready to lose RS 10 to gain RS 20 in this trade (leaving brokerage and other charges)

Let’s take another example Of Axis bank

Suppose you have bought axis bank around RS 670 and your stop loss will be 660 and target should be around RS 720 So, now in this case your risk-reward ratio will be 1:5 It means you are ready to lose RS 10 to gain RS 50 per quantity in this trade.

What is Stoploss?

The word stop-loss defines an advance order to sell the stock at a particular price point. A stop loss is used to limit your risk in your trade. You can put stop loss in advance trade at the time of executing your trade or you can also put stop-loss after your trade is executed.

 Remember you should always put stop loss in your trade to prevent your large losses.

Now Let’s Now what is Risk per Trade

 Risk per trade small percentage of your entire capital which you are ready to lose in a single trade. For a good Trader, the percentage should be 2 to 3% of entire capital in one trade.

For example, you have a capital of 1lakhs Rupees and according to the Risk per trade system, you can lose Rs2000 to 3000 in one trade.

 Now Let complete marge the entire method check how you can trade and minimize loss.

Let’s take an example to explain the entire process. So, a person name Raju whose capital is 1Lakhs Rupees 

So, her risk per trade is 2000 thousand Rupees from her entire capital Now he has analyzed a stock name ABC limited and the price of the stock is Rs200. Now the stop loss of the trade is 198 and the target should be around 204

So, the Risk reward ratio will be 1:2 Now Always remember that your stop loss doesn’t minimize your risk but You Position Sizing will be Minimize your risk.

Let simply explain what is position sizing means then again back to the example.

Position sizing means the quantity which you have bought according to your risk management system.

In the above example, your position sizing will be 1000 quantity in which Raju will get profit of 4000 in single trade and if it will hit her stop loss then he will loss 2000 Rupees.

If your analysis is 50:50 Means quite good then you have taken 5 profitable trades and 4 to 5 losing trades then also you will be profitable at the end.

                                                            Special Thanks to booming bulls

 We have Researched from Different Sources to give our best. We specially thanks to Booming Bulls channel because her content gives a grateful knowledge and helps a lot for writing this article