Key to success in share market is the risk management.

Risk Management is like a Lakshman Rekha to Gain Profit in Share market trading.

What is Risk Management?

The process of determining, evaluating, and reducing the possible losses that could result from stock market investments is known as risk management. It can assist you in maximizing your profits and making wise judgements. You can employ a variety of risk management strategies, including active portfolio management, hedging, diversification, and stop-loss.

Here are a few tactics you can use to control your risk in the stock market:

1. Spread your investments throughout a variety of industries, businesses, and asset classes to lessen the effect of market gyrations on your holdings.
2. To protect your positions from any losses resulting from unfavourable market moves, hedge your bets using derivatives like options or futures contracts.
3. When the market hits a particular level, you can limit your losses and lock in your profits by setting stop-loss and take-profit points.
4. Depending on the state of the market and your tolerance for risk, rebalance your portfolio between assets with higher and lower risk.
5. Keep a close eye on your portfolio, review it periodically, and adjust as needed to fit your investing approach and goals.

Also Read: The Future is Now: Experience Financial Freedom with the Power of Future Trading

What is Stop loss?

Most essential risk management in the trading is SL(Stop-Loss). An order type used by traders or investors to reduce their possible losses in the stock market is a stop-loss. It functions by automatically selling an asset when its price hits the stop price, which is a predetermined level. In the event that the security’s price drops further, this aids dealers in avoiding worse losses.

If you purchase a stock at ₹100 and place a stop-loss order at ₹95, for instance, the stock will be automatically sold if the price drops to ₹95 or below. You can keep your loss to ₹5 per share in this approach.

In a volatile market, stop-loss orders can help you control your risk and stay true to your investing plan. They do have certain drawbacks, though, include being susceptible to brief price swings, losing out on possible profits, or receiving a price that is lower than the stop price because of shifting market conditions.

As a result, you should exercise caution when using stop-loss orders and modify them in accordance with your risk tolerance and market analysis.

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What is limit order?

An order that directs a broker to purchase or sell a security at a particular price or above is known as a limit order. It gives traders the ability to manage risk and set the execution price, although it is not always filled. For instance, you can put up a buy limit order at ₹100 if you wish to purchase a stock at that price or less. Your request will be filled if the stock price falls to ₹100 or less. However, your order will not be fulfilled if the stock price remains above ₹100.

What is Market order?

An order to purchase or sell a security at the best price on the open market is known as a market order. When trading stocks, bonds, or other assets, this is the most popular and straightforward kind of order used by investors. If there are sufficient buyers and sellers in the market, a market order ensures a prompt execution even in the absence of a price specification. A market order does, however, also come with the possibility of receiving a worse price than anticipated, particularly for volatile or illiquid stocks.

What is Stop loss limit order?

 An order that combines the characteristics of a limit order with a stop order is known as a stop-limit order. Instead of adopting the current market price, it enables you to select a price range for purchasing or selling a securities. A stop price and a limit price are the two parts of a stop-limit order. The limit price is the highest or lowest price you are willing to take on for the trade, and the stop price is the point at which the order is activated.

Let’s say you have a stock that is now priced at ₹100 a share. You would like to sell it if the price drops below ₹95, but not below ₹90. A stop-limit order with a limit price of ₹90 and a stop price of ₹95 can be placed. Your order becomes a limit order to sell at ₹90 or higher if the stock price falls to ₹95 or below. Nevertheless, your order won’t be filled if the stock price drops below ₹90 before it does.

In a choppy market, a stop-limit order might help you safeguard your gains or minimize your losses. It does have some disadvantages, though, such the potential for partial fills if there is insufficient liquidity at your limit price or the chance of losing the trade if the price moves quickly or gaps beyond your limit price.

What is trailing stop loss?

When the market price of an asset moves in your favor, a trailing stop order automatically modifies the stop price. As the price fluctuates, it enables you to lock in profits or restrict losses. The stop price and the trailing amount are the two parts of a trailing stop order. In the event that the price goes against you, the order will be executed at the stop price. The trailing amount, which can be given as a percentage or a fixed number, is the difference between the market price and the stop price.

Let’s say, for instance, that you purchase a stock at ₹100 and that you have a 10% trailing stop order. This indicates that the stop price will start at ₹90, or 10% below the market price. The stop price will increase to ₹108 (10% below ₹120) if the stock price reaches ₹120. The stop price won’t alter, though, if the stock price drops to ₹110. The trailing stop order will be activated and the shares will be sold at market price if the price of the stock falls to ₹108 or less.

In a choppy market, a trailing stop order might help you safeguard your gains or reduce your losses. It does have certain disadvantages, though, like the potential for partial fills if there is insufficient liquidity at your stop price or the chance of missing the trade if the market rises quickly or gaps past your stop price.

What is the good percentage for Stop loss trailing order?

When the market price of an asset moves in your favor, a trailing stop order automatically modifies the stop price. As the price fluctuates, it enables you to lock in profits or restrict losses. The stop price and the trailing amount are the two parts of a trailing stop order. In the event that the price goes against you, the order will be executed at the stop price. The trailing amount, which can be given as a percentage or a fixed number, is the difference between the market price and the stop price.

Depending on your trading style, risk tolerance, and market conditions, a trailing stop order’s ideal percentage will vary. While there isn’t a clear solution, the following are some broad guidelines:

• A tighter trailing stop, which would safeguard your earnings faster, will be produced by a smaller percentage (like 5% or 10%), but it will also raise the possibility of getting stopped out by typical market swings.
• A broader trailing stop will be produced by a larger percentage (like 15% or 20%), which will provide your trade more breathing room but also expose you to greater potential losses.
• Using technical analysis tools to measure the price movement and volatility of the asset you are trading, such as trend lines, moving averages, support and resistance levels, and volatility indicators, is a smart technique to figure out the ideal proportion.

To determine which percentage works best for your trading strategy and objectives, you can also try out several percentages and backtest your findings.

Also Read: Risk Management in stock Market

(Disclaimer: Notice: Nothing in this post should be interpreted as financial advice; it is merely informational. Before making an investment, readers are urged to do their own research and speak with a financial expert. Any actions made in response to the material presented are not the responsibility of the author or the platform)