Finding consistent success in stock trading depends on identifying investments with the potential for delivering good returns and minimizing risk. Far too many traders forget the second but critical aspect when chasing returns. You must appreciate that just one bad investment can wash away all the returns you have generated in the previous investments.
Don’t Trade Without a Plan
Even though it may seem obvious, the purpose of making a trade is to make a profit. It is, therefore, vital to develop a clear plan about the specifics of the trade. These include the entry and exit positions and the period of the investment. You will also need to plan when to divest your investments, so you gain the maximum. You must not trade based on market rumors, tips from people without any credibility, and emotions. The essential difference between a successful trade that makes you money and one that makes a loss is a well-thought-out plan, observes Peter DeCaprio.
Diversify Your Portfolio
Diversifying your investment portfolio is among the most important risk mitigation strategies. You cannot ever be certain that any investment of your choice will deliver the returns you want. You should always attempt to have a balanced and diversified portfolio to minimize your risks. Even if is clear that a particular sector is booming, you should never focus exclusively on stocks in that sector. The situation can change overnight and leave you facing huge losses if the market tanks. The strategy for effective diversification is to invest in stocks belonging to different sectors not linked with each other directly.
Follow the One-Percent Rule
Traders, the world over, swear by the one-percent rule that recommends limiting the value of a single trade to a maximum of one percent of their capital. While it is a strategy you use to limit your trading risk, it is not cast in stone. If there is a good investment opportunity, you can consider vomiting more than one percent on a single trade. However, it is something that traders with low account value might consider. Those with a high account value may want to risk less than one percent on a single trade, says Peter DeCaprio.
Use a Stop-Loss Strategy
While you will always want to make a profit on your trades, you can have a situation where the value of your holding keeps going down. It is better to exit before you incur substantial losses. A stop-loss strategy is important because waiting for the stock to bounce back to its original price or more can be risky. Coming back to the breakeven point can be difficult for most stocks. They need to recover more than what they lose on a percent basis. For example, if a stock loses 30% of its value, it will need to rise by 43% to return to the price you had bought it.
Conclusion
The capital market can be volatile, and while you can win big, you can also get wiped out unless you invest prudently. Implementing conservative risk management strategies will help you survive and live to make profits. Being clear-headed, having a sound investment strategy, and not being emotional helps you to win.