As a recent entrant into the world of intraday trading, your first strategy would be to know how to soften your trading from unexpected losses. This is where risk management comes into effect as it can protect your account from losing money and prevent substantial losses.
As a day trader, you incur risk when you suffer a loss. If you can manage it, you open yourself to making good returns. By framing a robust risk management strategy and practising it with discipline, you will be able to yield profits from intraday trading. As a crucial component and prerequisite to successful intraday trading, risk management is generally overlooked.
At the end of the day, if you have generated significant profits, you could lose it all in just one or two bad trading sessions without an adequate risk management strategy. How then can you curb market risks?
Here, we look into some simple strategies that you can adapt to protect your trading profits. Below is a list of risk management pointers that you may want to consider in your day trades.
- Planning your trading technique: Throughout history, it is the planning and strategy of war beforehand, that goes into winning wars and not just the actual battle on the ground. Similarly, successful intraday traders generally follow the principle of ‘planning the trade and trading the plan’. This factor alone can define the line between profit and loss. To begin with, you may want to ensure that your broker can handle daily or frequent trading. You may wish to consider full-service and reputed brokers such as Kotak Securities that offer advanced analytical tools and in-depth chart patterns for active traders.
- When trading, plan with Stop-loss (S/L) and take-profit (T/P) points. Expert intraday traders are aware of the price they are willing to pay and the amount they want to sell. Using advanced knowledge and play, they measure the following results against the probability of the stock meeting their objectives. If they find that their adjusted yields are good enough, they carry out the trade.
On the other hand, new and impatient traders often enter without having a clue of the points at which they must sell to make a profit. Gambling on emotions can be the wrong move when trading. At such times, inexperienced traders hold onto their losses in the hope that they will receive the money back, while profits could tempt them to hold on to their stock unwisely, in their greed for more gains.
- Following the 1% rule: Many successful day traders follow the 1% rule. This means that they do not put more than 1% of the total capital or their trading account into a single trade. For instance, if you have Rs. 10,000 in your trading account, your position in any stock must not be more than Rs. 100. Ideally, it can help to keep the rule between 1% to 2% — any higher, and you could be risking a significant amount of your trading account.
Employ the right stop loss and take profit point based on your strategy. Setting effective stop-loss and take-profit points with the help of technical and fundamental analysis can play a significant role in your timing. You may also want to diversify your investment and hedge accordingly, without putting all your eggs in one basket. This can help you to open up to opportunities and significantly mitigate your risk.