Stock Trading Risk Management Strategies

A little known fact concerning successful investing in the stock market is that it is often more about how well you manage risk in your portfolio than how many times you guess correctly on the direction of a stock price. An investment strategy that does not contain a stock trading risk management plan is vulnerable to the market’s inevitable volatility, and may not perform as well over the long term.

In this day and age, it has become increasing more common for the task of financial planning, retirement saving, and investing to be the responsibility of the individual. Whereas before, a person could earn a reasonable interest rate on a CD or savings account, retire with a pension or company funded retirement plan, and collect Social Security, now it is rare to even receive an employer match on your 401k.

With more and more people handling their investments themselves, either through company sponsored plans or individual accounts, the importance of learning the ways to manage risk has become paramount to avoid losses and realize gains in the stock market and realizing the ultimate goal of building real, lasting wealth.

The Closest Thing To Portfolio Insurance

The only absolute in the world of investing is that with no risk comes no reward. While bank deposits and CDs are risk-free, the return on investment from these financial vehicles often times does not even cover the rate of inflation. Only by assuming risk, can you make your money work harder and be on your way to building lasting wealth.

That is why the knowledge of stock trading risk management is so important. By understanding how to use position sizing, contingent orders, stop orders, and other strategies, you can take the steps necessary to mitigate losses and maximize gains.

While there is no such thing as “portfolio insurance”, or a “sure thing” when it comes to investing in the stock market – no matter what anyone tells you – the proper management of risk can help you realize gains in any type of market.

No Fancy Investment Products Required

When it comes to stock trading risk management you do not necessarily need to invest in complicated inverse ETFs or even options contracts to profit in volatile markets. By utilizing correct position sizing, stop and limit orders, and having an exit strategy in place you can minimize risk, and maximize profits.

A thorough understanding of your unique financial situation, goals, available capital for investing, time frame and risk tolerance is crucial in developing the stock trading risk management plan that is best for you.

It is also critical to successful investing to understand that being “right” and making money are not the same thing, and an investor’s own mindset can often be the biggest roadblock to success. Too many times a losing investment is held too long by an investor because, in the absence of a pre-set plan, emotional and psychological issues take over, and overwhelm reason leading to unnecessary losses.

By taking a honest look at yourself, and your financial goals and current situation, you can successfully implement stock trading risk management into your investment strategy. While there are no guarantees in the world of stock investing, the following articles can guide you on your path to managing risk, and building lasting wealth.