Risk Management Tips for Stock Traders

Risk Management Tips for Stock Traders

Risk management is very important, but often ranks very low on the priority list of most traders. They often overlook the importance of managing risk in their positions or trades. It is normally way behind finding a better indicator, more accurate signals or worrying about stop hunting and unfair algo-trading practices.

As a trader or investor, this is the only thing that can be managed or controlled. Traders can never control or dictate the directions of the markets. They can also never manipulate whether they will win or lose in any position they take. Indeed, the only thing they can take control of is the amount of loss they might incur.

A trader who has produced great profits over his or her lifetime can lose it all in just a single or two ruthless trade, if proper risk management is not applied. Many people can trade, but not all are capable of analyzing the risk and manage the risk in a way that secures and ensures their financial survival in the markets when things go bad.

Without proper knowledge about risk management, profitable trading is never possible. A trader needs to know how to manage his risk, size his positions, create a positive outlook for his performance, and set his orders correctly, if he wishes to have a profitable trading journey.

This article will suggest some tips for risk management in stock trading.

  1. Recognize your risk

Some of the factors that might cause a risk to your trading are: politics, interest rates, liquidity and even the prices of other assets. Know, recognize and learn all the probable risks connected with the asset you are about to trade, and you can begin to go on your way reducing them early.

  1. Prepare your risk limits

Prior setting the line of the profit you are aiming for, think and decide how much you can afford to lose. Your trading plan should composed of how much loss you can take in the whole, and on each individual trade.

  1. Know how to acquire losses

You can actually set stop losses accordingly, if you know your risk limits for each trade. Moving a stop loss on a losing trade, because you expect it might swing back into profit is rarely a nice idea. Leaving losses run on bad trades will make them even worse, never better.

  1. Evade emotional trading

According to a study in 2011, the negative impact of emotional trading can end up costing you 20% in returns over ten years. And it is not just responding badly to losses, as the complete happiness that comes with a progressive trade can be just as risky as the disappointment with a failed one.

  1. Don’t go along with the mob

Every individual trader has their own risk tolerance, and just because other traders are suggesting a trade doesn’t necessarily mean that it is a good fit or appropriate for you. This is actually right for stop losses and strategies as well. Just remember that you should know your own risk, and plan accordingly.

Good trading isn’t always referred to having the right stocks or the right prices. It is much connected to your ability and knowledge of managing your risk, and assimilating a strong risk management philosophy into your trading strategy.

Learn the Different Types of Trading Style

Learn the Different Types of Trading Style

A lot of people who get interested in trading are primarily acquainted with the financial markets through investing. The purpose of investing is to grow wealth slowly over time, and this has normally been done through  a buy-and-hold approach, making investments and allowing price to alter over time. Investors endure the unavoidable downturns with the anticipation that prices will, in the long run, rebound and rise over the long-term.

Selecting the trading style that best fits your personality can be a difficult undertaking, especially if you are a beginner trader, but it is certainly essential to your long-term success as a professional trader. When you finally found the style of trading that best suits you, a light often turns on and you may never look back. If you are not comfortable with your style or have not found a home in a specific trading style, you are prone to committing the biggest sins of trading.

The difference between the styles is based on the length of time that trades are held for.  Below are the different types of trading style you should learn about to help pave your way to becoming a profitable trader.

  • Scalping

This type of trading style requires trading within just a few seconds of each other, and often goes in opposite directions, as it is a very quick type of trading style. This style is very appropriate for active traders who can decide quickly and act on his decisions without reluctance. Impatient people often are the best scalpers, because they always anticipate their trades to get profitable promptly, and will exit the trade quickly if it is going against their trading whims. To become a successful scalper, you have to have focus and concentration. So, if you are a type of trader who easily get distracted, then scalping is not for you.

  • Day Trading

This type of trading style is more appropriate for traders who like beginning and accomplishing a task within just the same day. A lot of day traders would not think of making swing trade or position trade because if they do, it will cause them to stay awake at night knowing that they had an active trade that could be affected by price movements during the night.

  • Swing Trading

This type of trading style is well-matched with people who have patience for a trade, but once they have started a trade they want it to be profitable quite quick. Traders of this style almost always hold their trades overnight, therefore, those people, who get nervous holding a trade while they are away from their computer, are not fit for this style. Generally, this trading needs a larger stop loss than day trading, so it is necessary to have the ability to get calm when a trade goes against you.

  • Position Trading

This type of trading style is the longest term trading of all the styles and often possess trades that last for years. That means, position trading is very compatible for people who have more patience and least excitement. This style requires the ability to disregard popular opinion because a single position trade will often hold through both bull and bear markets. So, if you easily get persuaded by other people, then position trading is going to intricate on your part.

Aside from the reason that picking a trading style needs the flexibility to perceive if a certain trading style is not working for you, it also needs the consistency to stay with the right trading style even when it is not performing optimally.

Some Ways to Improve Your Investment Skills

Some Ways to Improve Your Investment Skills

Investing is a skill that anyone can learn and acquire if only they want to. Some follow the advice and suggestions of analysts and a financial adviser, but they actually can only take you a little far. Yes, they can give you recommendations, but the most appropriate for you will come from making your own choices and decisions for what is essential at what time in your life.

Investors who assess a company can better judge the value of its stock and profit from buying and selling it. Your biggest asset in stock investing is your knowledge. Whether you are a beginner trader or a  seasoned veteran, there are few things you can do to improve your investing skills. Others are making the best of a bad situation by learning about how things went wrong.

To succeed in the world of stock investing, here are some ways to improve your investing skills.

  • Do some research

Some people simply get tips and advice from others when making some of their most important choices in regards to investments. It is very vital that you improve and add your knowledge base and practically learn about the companies you are thinking about investing your money with. Learn everything as much as you can, so you can make informed decisions.

  • Assess your financial goals

Probably something happened in your life that suddenly changed your financial perspectives, and maybe now you have thought of making more wealth for yourself. Perhaps retirement is fast approaching and you would like to adjust your portfolio and eradicate those riskier investments. Whatever the case may be, you must think about where you are and where you want to be. Only then can you make the right action plan that will come across with your needs.

  • Don’t rush things

Some experienced trader will tell you that there are times to bail out and times to weather the storm. You should always make sure that you know what the right strategy is for some of your investments. Take a look back on the past data and see what you can learn from it before you go changing everything in your portfolio.

  • Deliberate your risk

This comes together with your evaluation of goals. Maybe some of your holdings are just becoming too volatile, which could unfavorably affect your assets for years to come. For others, this time of low prices may seem like the appropriate time to buy up affordable shares and wait for the upswing. In either case, you are still going to need to analyze or evaluate the situation and create an informed decision that is right and best for you.

  • Just invest persistently

One of the most important things a trader can learn from these kinds of economic situations is that things come and go or decline or grow in the market. There will always be good and bad times. The primary thing is, don’t

Stop investing your money. Yes, you will have to think of the right place for your money, but don’t just settle on it. Things will get back to normal, soon and you will wish you had kept at it when things are good again.

Some Disadvantages of Portfolio Diversification

Some Disadvantages of Portfolio Diversification

Making your portfolio diversified across a number of various investment categories, such as stocks, bonds, and cash equivalents, and within categories, such as stocks from different kinds of companies and a mix of corporate and government bonds can help decrease your risk. But there can be some disadvantages to diversification.

Indeed, diversification is universally recommended to lessen the risks of losing money, volatility and emotional stress. However, just as it can limit downside by reducing the possible risk and volatility across a group of investments, it can also limit your upside. It is actually possible for diversification to increase your risk if it leads you to buy investments that are too risky or that you don’t even understand very well.

A more-diversified portfolio can also be more time-consuming to handle than a less-diversified one, because you need to follow and trade in more investments, adding more layers of diversification just to make sure you are following to them. If maintaining your diversification requires you to micromanage and trade more frequently, transaction costs could be higher.

Below are some disadvantages of diversification that you might encounter eventually in your investment journey.

  1. Incomplete Return

Diversification can help you from striking out,  but it also keeps you from hitting a home run. For instance, if you invest your money in five various stocks, and one takes off, the other four stocks hold back your total return.

  1. Cost

Typically, you have the option of investing through a full-service broker, a discount broker or an online broker. Each category of broker has a unique commission format, and they all actually charge commissions or transaction fees. Placing all your money into a single investment normally can end up to a lower total fee than investing the similar amount of cash to a number various investments.

  1. Missed Fortune

You are neither to make a huge profit from a single sector nor to suffer a huge loss, if your portfolio is widely diversified. If 5 percent of your holding unexpectedly spike, you will make far lesser profit than if 100 percent of your holdings were in that place. It is very difficult to forecast or predict where and when this will occur to an asset class or market sector. The more firmly your investments are focused, the greater risk you are actually taking, and this can lead to bigger losses or to bigger gains.

  1. Wider Exposure

You could experience some amount loss whenever some part of your portfolio declines in value, if your holdings are widely diversified. If the overall market is decreasing, it is more likely that your holdings will perform the same thing. When you diversify your investments, you safeguard yourself from extreme financial exposure, but at the cost of missing out on probable major profits.

  1. No remedy

If you invest in a number of different stocks that all end up to be problems, your portfolio will still lose money, even if it is diversified. That’s it, diversification neither guarantees a profit, nor completely secure you against a loss.

Investors’ Common Diversification Mistakes

Investors’ Common Diversification Mistakes

Oftentimes, investors have a lot of things to consider, but some investment decisions matter more than asset allocation. A well diversified portfolio is important for young investors as well as for retirees. You may want to have a diversified portfolio so you can have your money resting in various types of assets. This is because if one investment declines, it won’t significantly affect others. So, if you got an investment that extends across a wide range of various types of assets, then you lessen the risk to your portfolio in whole.

Sadly, there are some investors who don’t know anything more about diversification. As the quotation says, don’t put all your eggs in one basket. Allotting time to fully decipher the ways and practices you might be executing yourself could earnestly improve your portfolio returns and deter shattering risk.

A well-known belief that exists is that younger persons should invest more in stocks and older beings should buy more bonds. Other people like to follow the “100 minus your age” rule to identify asset allocation. Begin with the number 100 and subtract your age. The difference is the certain percentage you should invest in stocks, and the rest should be allocated in bonds.

The simple rules or methods of thinking and deciding one’s asset allocation should build a long term growth for the investor, while giving fixed income stability. While it’s not a bad situation to start for the novice, there are a lot more things to consider when forming a completely diversified portfolio. Below are some investors’s mistakes they commit to diversification.

  1. Handling too many stocks which costs can destroy you

The more stocks an investor handles or owns, the more they likely to experience higher transaction fees as the relative size of their orders are condensed in relation to the fixed costs of trading. These higher transaction prices significantly lessen long term returns, especially in smaller portfolio sizes.

  1. Handling too few stocks which lead you to lose

Owning a few stocks may reduce your portfolio volatility, but the real risk is it significantly underperforms the market by missing the winners. According to a renowned financial theorist that you could only lessen the risk of underperformance by owning the entire market. Intuitively, by owning too many stocks, there will come a time when the impact of looking for a winner has a negligible effect on your portfolio, which rather destroys the joy of it.

  1. Mistakenly diversified portfolio

In the portfolio theory, it has shown that there is an ideal level of diversification between 2 stocks which both minimizes risk and maximizes return, ideally you want to own stocks that changes direction sharply to achieve this. But while this may be easy in theory, it seems to be way beyond the awareness of most investors. Higher portfolio volatility lays far greater emotional pressure on less urbane investors contributing to shoddy decision making and worse returns.

Some Tips to Diversify your Portfolio

Some Tips to Diversify your Portfolio

Diversification is using various trading strategies and ways for an investor to have a great chance of survival. However, if diversification is not done effectively, it can have an opposite impact and compound instead of diminish risk. So, it is better to have diversification done in a correct and proper way.

Diversification is a battle cry for many financial planners, fund managers and individual investors alike. It appears almost impossible to sell a stock for any less than the price at which you purchased it, when the market is increasing. It may also seem silly to be in anything but equities, when the indexes are surging up. We should take into account the importance of a diversified portfolio in any market situation, because we are unsure of what will happen in the market at any moment.

Moreover, it is always important to regularly check your portfolio. You must always check your asset allocation, at least once a year, or anytime  your financial circumstances change significantly. Checking will help you to identify your need to re-balance your asset mix or reconsider some of your specific investments.

Setting and maintaining your strategic asset allocation are among the most important rudiments to achieve long-term investment success.  Below are some tips to help you in diversifying your portfolio.

  1. Extend your wealth

Never put all your investment in one stock or sector, although equities are good. You should build your unique virtual mutual fund by investing in some companies you know, trust and even use daily. Knowing a company or using its goods and services can be a good approach to investing.

  1. Think of index fund or bond fund

Investing in securities that traces different indexes make a good long-term diversified investment for your portfolio. You may consider adding index funds or fixed-income funds to the mix. You are dodging more your portfolio against market volatility and uncertainty, through adding some fixed solutions.

  1. Continue building

If you have $10,000 at hand to invest, use dollar-cost averaging approach. This is used to smooth out the peaks and valleys created by market volatility, you invest cash regularly in a specified portfolio or funds. Add to your investment on a regular basis.

  1. Know when to leave

Stay current with your investments and keep in touch with the over-all market situations. Not because you have your investments on autopilot doesn’t mean you should ignore the forces at work, even though buying, holding and dollar-cost averaging sounds good strategies. You should know what is happening to the companies you invest in.

  1. Keep your eyes on commissions

You should understand and know what you are getting for the fees you are paying, if you are not the trading type of investor. Some companies attach a monthly fee, while others charge transaction fees. Be watchful and knowledgeable about what you are paying and what you are getting for it. You should keep in mind that the cheapest choice is now always the best.

Investing is a worthwhile thing to do if we take a disciplined approach, using diversification, buy-and-hold and dollar-cost-averaging strategies when investing. It can be fun to do even in the worst of times.

 

SOME RULES TO CONSIDER IN PICKING A MUTUAL FUND

SOME RULES TO CONSIDER IN PICKING A MUTUAL FUND

One of the biggest struggles that many investors face is picking a right mutual fund structure that would suit their needs. Looking for a scheme from thousands of mutual fund schemes available in the market is not a piece of cake. However, you would be comfortable if you are prepared to obey some broad rules.

Now, if you are thinking of investing in mutual funds, but aren’t sure how to go about it or which one is the most suitable for your needs, you need not to worry because someone out there shares the same sentiment. You are simply not alone. Below are some rules you may want to consider in picking the right mutual fund that will help you achieve your ultimate goal of success in investing.

  1. Pay full attention to expenses

Over extended periods, funds with lower cost beat funds with higher cost. Costs can be the best indicator of future returns. By simply picking funds with low cost almost doubles your chances of beating an index.

  1. Taking importance of the company’s culture

The fund’s expense ratio often shows you what kind of company you are investing with. Are you investing with an avaricious financial-services firm, ready to tout you whatever is in trend this season? Or are you buying from a company that sees you as a long-term client? The second variety tends to charge less.

The way a company treats you as an investor normally reflects how it treats its employees. Be reminded that even halfway experienced money managers can find high-paying work elsewhere if the company they are working for maltreats them.

  1. Find the consistency of style

It is so important hat a manager stick to a certain investing style, for a fund to fall perfectly into a diversified portfolio. Let’s say if you purchased a fund because you want your portfolio to include small value stocks, then you don’t opt for a fund manager jumping into a large growth issue.

  1. Be mindful of the risks

Make sure that you check out the direction the fund took to rack up past gains and decide whether it would be convenient for you to take the ride. Compare to returns that may vary, funds that have been risky tend to stay risky.

  1. Seek for the background performance

You should seek for the fund’s long-term performance record, at least three to five years, versus that of its peers, as well as how it has fared over shorter stretches. Match the results to the category averages, you cannot really fault a small-cap fund manager for worthless year if a small-cap funds performed poorly.

  1. Look for low taxes

You can never forget about taxes simply because you do not want to sell your fund shares. As a fund owner, you also possess all the stocks in the fund’s portfolio. If the fund manager sells a stock for a large capital gain, you should report that gain on your tax return.

In picking a mutual fund, always make sure that its strategy is aligned with your investment goals. Selecting a mutual fund may appear like an intimidating task to do, but knowing your investment goals and risk tolerance can take you to the halfway of the battle. If you take the above-mentioned rules into considerations in picking a mutual fund, you will accelerate your chances of success.