Components of Risk Management

Risk management is one of the most important things to do in the stock markets. One key work of the strategy is to make sure that losses are redues, because, losses will always be there no matter how good the strategy is, but a good strategy is able to ensure that losses are lesser than the profits.

We have highlighted some key components that are part of risk management

• Always setting a target and stoploss for every trade that happens. And the range in the target and stoploss should be such that the target is always more than the stoploss and maybe even a bit higher so as to accomodate the losses in transactional costs.
• Having atleast 5–10 stocks in a portfolio. It is a not a good habit to trade on a single stocl only. For when it falls, the entire capital will be eroded. Having multiple stocks, especially from diffenent sectors is always a good idea to reduce the risks.
• Be hopeful for the best and prepared for the worst. Using this ideology, set the ranges of the targets and stoploss. One should know how much money can he/she afford to loss.
• Using Stress Testing to get to know how bad can a strategy can go. Stress Testing is a tool which is very similar to a backtesting system but on artificially created data, which no one has seen. Its always a good practice to test your strategy on stress testing modules also before taking it live.