10
2024/05
Elevate your trading strategy: Risk management key points you need
Simply put, risk management controls risks in various corners and aspects of society. For example, speed limits while driving primarily aim to reduce the risk of accidents due to speeding.
Similarly, wearing seat belts while driving and not carrying flammable goods on airplanes are methods to keep risks under control. This emphasizes the need for daily risk management, which goes beyond trading.
For individual traders, the most important aspect is to ensure sufficient funds to maximize capital efficiency, even if there are losses in multiple or single trades.
Stop-loss orders are an essential part of risk management. So, let’s talk about how to establish appropriate stop-loss orders.
Before we go into stop-loss orders, it’s essential to establish one concept: whether the market is bullish or bearish isn’t the issue.
Instead, the primary considerations are knowing target positions, risk points, and how to respond if the market swings against you. Setting stop-loss orders handles these eventualities and serves as a risk-management strategy.
How do you set stop-loss orders?
1. Multiplying the average price volatility over 20 days by a coefficient suitable for medium to long-term trades.
2. Setting the stop-loss slightly above the previous high or below the previous low, suitable for capturing trend reversals.
3. Placing the stop-loss below key support levels or above key resistance levels, suitable for short to medium-term trades.
4. Setting the stop-loss near significant price levels, suitable for short-term trades.
5. Placing the stop-loss near the midline of a price channel, suitable for short to medium-term trades.
However, no stop-loss method is perfect; each has its weaknesses. For example, way 1 carries higher risk exposure, while ways 2, 3, 4, and 5 require careful consideration of the distance from the reference point to set the stop-loss.
