Risk Management Techniques for Active Traders

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Almost everything has inherent risk attached to it and even in trading as a stock trader; you’ll need to manage the risk associated with your portfolio. You’ll need to consider the size of the fund, the anticipated or required profit, and the potential loss. 

Planning and strategy can often mean the difference between success and failure.  

If you want to be a trader, you need to create a trading plan for yourself. Such as a method of how and where you’re going to enter the market. 

How much risk to take on each trade, what percentage of account equity to risk per trade, exit plans for when a trades goes wrong or goes right. How long to give a trade to start working before pulling the plug on it and what are your odds/probabilities of a successful trade or a losing trade. 

Position yourself for profits, don’t bet the house  

When it comes to how much money should you invest in each small cap share you buy it’s about managing your cash wisely when investing in penny shares.  

Never put all your money on the line at any single time. If you do, you could wipe yourself out on a single loser.  

Francois Joubert, the editor of Red Hot Penny Shares rule of thumb is  

– If you’ve less than R30 000 then invest R5000 in each company you buy shares of.  

– If you’ve between R30 000 and R100 000 you should be buying R10 000 worth of shares at a time.  

– And when you’ve more than R100 000 you should put between 5% and 15% of your money into shares you buy.  

A gain isn’t a gain until it has been realised 

 Remember that at some time you need to take your profits. It’s not money until it’s in your bank account. This means that you need to be aware of what profit you want to take from your trade.  

Joubert says, Too many traders see a position move to their target price, and then decide to hang on for a few more pennies: after all the stock is hot. 

When the stock moves down a little, they continue to hang on: it’s just a temporary downside in an upward trend. Then the unthinkable happens. The stock falls through the price at which they bought the stock. 

Don’t get caught in this trap. Risk management doesn’t stop at knowing when to take a loss or how to minimise losses: it’s also about knowing when to take profits.

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