Risk Management When Trading Stock

Most active traders are intimately familiar with basic risk management — planning entrances and exits before execution and following through with appropriate stop-loss and take-profit orders. However, risk management is much more complicated than simply being aware of at which price points you are willing to buy and sell.

This most basic strategy should not be belittled or ignored, however; one of the starkest differences between success and failure in active trading is going into an execution confidently prepped or ridiculously unprepared.

Strict risk management “rules” are in place to eliminate emotional overhaul. By relying on pre-set numbers reinforced by accurate historical evidence, you are less likely to get in your own way and make rash decisions.

So, what can you do beyond the standard implementation of S/L and T/P orders?

For one, consider adjusting your S/L points to stop-limit orders, which can help remove the possibility of selling during a time of volatile decline as opposed to orderly patterned decline.

Watch this video published by Investopedia for an overview on the differences between stop orders and limit orders.

The Best Risk Management Advice: Don’t just do research once; stay on top of your stocks’ history-in-the-making.

As the sessions pass, history is constantly rewritten, taking into account the newest movements in relation to all of those in the past. Key support and resistance levels are continuously altered every day; the levels may only change by miniscule percentages, but with a single day’s data included, the overall trend longevity shifts.

  • Be aware of moving averages for a multitude of timeframes – look at the 5-, 10-, 30-, 100-, 200-day moving averages, as mini-trends can exist within the overall meta-trend.
  • Adjust and update support/resistance trendlines (connect highs/lows to above-average volume)—this will help determine points where the stock price reacted against the trendline and help anticipate future movements.

Ideally, these above two methods should be used in conjunction with the following considerations:

  • Volatile stocks should be handled differently than more stable stocks: use longer-term moving averages to reduce the chance that a meaningless price swing will trigger a stop-loss order from being executed.
  • Similarly, moving averages should match the ranges of price targets: longer targets should be used in conjunction with longer moving averages, shorter targets can be used with shorter moving averages.
  • Stop-loss orders should be altered contingent upon the market’s volatility: with less frequent or drastic movements, the S/L points can be constricted.

Also, remember to put the stock in a larger context. Use known fundamental events to prudently influence your entrances and exits. Earnings releases, mergers and acquisitions can all be categorized as key time periods to be in or out of a trade.

Please visit our main Active Trading Blog for more industry info and tips.

Lightspeed Financial Services Group LLC is not affiliated with these third-party market commentators/educators or service providers. Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lightspeed Financial Services Group LLC does not endorse, offer nor recommend any of the services or commentary provided by any of the market commentators/educators or service providers and any information used to execute any trading strategies are solely based on the independent analysis of the user.

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