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Strategies for Risk Management for earning profit in forex market and stock trading

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Risk management is essential for active trading. It basically safeguards the profits of the trader against bad trades. The objective of risk management is to ensure that uncertainty does not deter the entrepreneur from achieving the business goals. Here are some innovative strategies for protecting the trading profits.

Planning is the Key to Success
Just like a war you need to plan meticulously in the trade as well. Planning in a trade is the differentiating factor between failure and success. The ‘Stop-Loss and the Take-Profit’ points represent the chief ways for traders to plan in business. The efficient traders know the exact points at which they can sell at loss or profit and measure their returns against the stock probability hitting the goals. If they assess a high return they execute the trade and otherwise do not.
On the other hand, the unsuccessful traders enter the trade without any idea of the ‘selling points.’ Rather than taking calculated decisions, they take emotional decisions and incur loss in their business.

The ‘Stop-Loss and Take-Profit Points’ Strategy
The ‘stop-loss (S/L)’ point is that price where traders take loss.  Traders take this decision when the trade does not conclude the way it had been planned. In such a case the points are chalked out in a way it can prevent the losses from escalating.
The ‘take-profit (T/P)’ point is that price where businessmen take profits. This point is determined when the extra upside movement is restricted by the risks. For instance, if the stock approaches the level of key resistance after the huge upward movement, traders sell their goods before the consolidated period occurs.

Setting Up of the Stop-Loss Points Effectively
Setting the take-profit and the stop-loss points is done by making use of the fundamental analysis as well as the technical analysis. For instance, a trader holding a stock may release it into the market before the take-profit price is hit if the expectations become high.

The best way to set up the ‘stop-loss’ points is the moving averages. It is an indicator that helps to smooth the price action. These are tracked widely by the market and can be calculated easily. These include 5-,9-,50-, 20-, 200-, and 100-day averages. You can set these by applying to the stock’s chart and assessing whether ‘stock price’ has reacted to these in past as a resistance or support level.

You can even place the take-profit or stop-loss points on the resistance or support ‘trendlines.’ The main aim is to determine the points at which price reverts to ‘trendlines’ with a huge volume.
When setting the T/P or S/L points, here are some chief factors to consider:

  1. Make use of moving averages that are long-term for the more ‘volatile stocks’ in order to minimize the chance that meaningless price fluctuations can trigger, for the ‘stop-loss’ order to be carried out.

  2. Modify moving averages for matching the target price range. For instance, for longer targets use longer moving averages for lowering the signals generated.

  3. The stop losses need not be closer than the 1.5 times of the present ‘high-to-low’ range.

  4. Make sure stop-loss is in accordance with a market’s volatility. You can tighten the stop-loss points if the ‘stock price’ is not moving much.

  5. Make use of familiar fundamental events like ‘earnings releases’ as chief ‘time-periods’ for being out or into a trade as the uncertainty and volatility may rise.

Calculate the Expected Return
Setting up of the ‘take-profit’ or ‘stop-loss’ points are required for calculating the expected return. It is important to calculate the expected return as it compels the traders to assess and rationalize their trades. It offers a systematic approach for comparing the different traders and selecting the lucrative ones.

You can calculate the expected return using the formula as follows:
[(Probability of Gain) X (Take Profit % Gain)]+ [(Probability of Loss) X (Stop Loss% Loss)]
From the above formula, a trader can calculate the expected return of a trade and likewise measure it keeping in mind the opportunities for determining the stocks for trading. The amateur traders can calculate the loss or gain from the breakdowns or breakouts from the resistance or support levels; whereas the experienced traders can just make educated guesses.
Thus, the key to success in trade is planning meticulously. By making use of the stop-loss points effectively the traders can not only lower the losses but even the frequency at which they exit the trade unnecessarily.

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