Do you blindly follow the mantra- the higher the risk, the higher the return? In doing so, you could lose out on a large part of your wealth creation. Instead, you can play smart in the stock market and adopt risk management strategies to make better investment decisions. The stock market can be a great source of wealth creation if you take calculated risks and make smart decisions.

Not taking risks is often not the best way to manage risk.”

I Raghuram Mr. Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy

What is meant by risk management?

Risk management is a process of identifying and assessing risks and taking necessary measures to protect oneself from risk. It focuses on strategies to reduce and manage risk. Think of the risk as a coin for once. Reward is one side of the coin whereas loss is the other side of the coin. People often overlook the loss side and do not understand the importance of risk management in the stock market.

Now, let us understand what are the risk management strategies you can adopt in the stock market Business,

risk management in stock market

follow stock market trends

Many investors believe that trading against the market trend will yield good returns. However, this is one of the common mistakes investors make. Following the stock market trend is one of the risk management strategies that helps you decide whether you should invest or not. candlestick pattern It is one of the most effective tools for identifying trends in the stock market. Hence, it helps you to make buy or sell decisions following the prevailing stock market trend.

diversification in portfolio

Diversification in a portfolio means that you invest in two or more major financial instrument in stock market. In addition, you can diversify your investments in the stock market in different sectors. Diversified portfolio protects you from market volatility in a specific sector or specific company. As a result, if one investment fails, the performance of the other investments balances out the returns.

Set stop loss level and take profit level

Successful traders usually quote the phrase: “plan the trade and trade the plan”. You must assess risk taking ability and determine open and close position, Let us understand what is stop loss and take profit level.

stop loss is lowest point On which the investor is aiming to prevent further losses. This helps to minimize your losses when the stock is close to the support level.

Whereas, take profit is highest price level On which the investor is ready to sell and book profits. This helps in booking profits as the stocks are moving towards the resistance level and going down thereafter.

one percent rule

The one percent rule states that you should never invest more than 1% of your capital business account in the same business. For example, if you have Rs. 10000 in your account, you should not invest more than $100 in one trade. This is a general rule that many traders follow while trading whose account is less than Rs.100000. If you have more capital you can go up to 2% and not more so as to prevent substantial losses.

Assess your risk taking ability

You should assess your sources of income and determine an amount that you think you can invest per day or month. To determine the amount you should ideally invest, follow the 50-20-30 financial thumb rule. read more,

The stock market is unpredictable and you can lose all your assets because of one wrong trade. Thus, risk management in the stock market is important to protect you from losses and make profitable trades.

Importance of risk management in trading

Risk management is important in stock trading because:

  • protects from potentially heavy losses in future
  • it helps you take calculated risk,
  • you know yourself risk appetite So plan your finances accordingly.
  • it helps you Set entry and exit points,
  • it helps you Make smart and profitable investment decisions,

Lastly, we hope that you found our article on Risk Management Strategies in the Stock Market very useful. Please subscribe to our newsletter and never miss an opportunity to get articles delivered straight to your inbox. You must be thinking that how can you make profit in this type of market situation? Don’t worry! We have it all covered! learn from StoxMaster- India’s Top Online Stock Market Training Academy and get involved in profit making StoxMaster’s Technical Analysis Course And be trained to trade in any market condition. check out free calls on telegram Here. you can learn from us too free youtube videos For stock market tips and advice. Click here if you want to open a new Demat account to save your brokerage Open Upstox Demat Account