Whether you are investing with a long-term strategy or the short-term, knowing how to incorporate proper risk management is crucial. Why? Because just a small crevice in your strategy can make you count loss. The loss may get so massive that you may wind up losing all the money you have made over months or years of trading. Does it ring any kind of bell? Well, if yes, it’s good for you. You are already a step closer to developing robust risk management just by realising the devastating impact of lacking it.
Day Trading Risk Management Method
The very first step of this method is to realise the importance of risk management. The second step is getting to know about all the instruments and elements the loss management conforms to. Let’s indulge in learning about them,
1. Support
Support is the level where the price struggles to fall further below. It’s the line where buyers get strong and prevent the price from further going down. Instead, it bounces back, and most of the time spawns a breakout. View page of Saxo and know more about breakout trading method. Soon you will feel confident like the UK traders in real life trading.
If a movement digs even deeper than the support line, it indicates a major weakness. The market is more likely to see even a longer downward trend.
2. Resistance
Resistance is, in most ways, the opposite of support. It is the level or zone where a price movement struggles to surpass. In that zone, traders will observe strong selling’s purview of the market. The buyers are likely to lose their control over the market movement.
When the price strikes the resistance line, a breakout chance emerges. If the buyers lose all the controls and sellers get enough strength, they push the price beyond resistance and create a breakout.
A perfect breakout creates a new resistance line turning the previous one into a support.
3. Breakouts
This article has decided to converse over the breakouts holding it as a property of risk management. It is because the breakouts intervene in a traders’ decision-making process often. The market will sometimes sprout false breakouts below the support line and above the resistance line.
Being careless will just ensure more destruction. If anyone set their risk managing instruments depending on a false breakout signal, it will be unfortunate for him. False breakout will take no time to turn your high expectation into odious misfortune.
4. Profit Target
Many will know the term as take-profit. It is one of two positions that everyone is bound to define before entering a trade. With take profit option, one just locks an amount of money as his profit target. When the target amount is achieved, he can take either of two options: he can exit the trend or sell only half of his investments and continue making more profit.
Experts determine a potential take profit position by estimating the current resistance line. He respects the line and set a profit target point below it.
5. Loss Level
The other mandatory position that all traders determine while entering a trade is the stop-loss. This position represents a trader’s highest loss tolerance for a particular transaction. With this option, an investor sets a determiner inputting the amount of money he is ready to lose for that specific session. Once the defined amount is reached, the trade stops.
A concerned trader set estimates a movement’s lowest level to make a comeback. He sets his stop-loss position there and quickly makes an exit as soon as the price goes down that level.
The ratio of loss and reward is also needed to be handled with regards. Traders should always go for the trades, which project more reward possibilities. By dealing with all these concepts and instruments carefully, anyone can lower his probable loss amount to the minimum.
