To manage your risk effectively, it has to begin with the understanding that the markets can be dangerous. Once you understand that, the easier it will become to learn the lessons that help you manage it. Exchange traded funds (ETFs) can help you make it even easier.The stock market can be an unfriendly place, and sometimes, a dangerous place to be if you’re not careful of what you’re doing. Here are 10 ways to manage the amount of risk you endure and survive with as little abrasion as possible. Stock chartisit recommends the following excellent points:
- Visualize Losses. Rather than focusing on profits, decide how much you can stand to lose on each trade before you take a position.
- Know Your Pain Threshold. By putting an actual dollar amount on how much you can stand to lose, you can approach with a strategy and get out when you want to wait the market out.
- Free Trades. Start with a small position if you’re unsure of the risk you’re taking on, then add to it as you get it to move in your favor and you become more comfortable.
- Shift Your Timing. Take profits early or late, but don’t panic in the middle and make a rash decision.
- Time and Sales Do Not Matter. Do not follow what other traders are doing. Do your own trades based upon numbers, trends and your strategy.
- Keep a Bottom Line. Consolidate all accounts on a spreadsheet to get a sense of the bigger picture. Winning a few trades here and there does not mean your account is alright.
- Basket Mentality. ETFs can help mitigate some risk that incurs with single stock picking, and they offer total transparency at a low cost.
- Settle. Make your targets in the ideal mind set, but remember to stay in the real world. Do not ask too much of a trade or have outsize expectations.
- Inner Voice. Shakeout mode in the markets occur for a few days each month, so try and refrain from participating. Stick to the strategy instead and always maintain your rational approach.
- Embrace Chaos. Financial markets can shift on a dime, so accept that they will do what they want, when they want. Chaos happens, so be prepared with an exit strategy to help protect any gains and limit losses.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.