Buying and selling stocks on the same day is called as intraday trading. This means that traders are exposed to the volatility of the stock market, which can be unpredictable. Intraday trading can be an exciting and profitable way to invest in the stock market. It is vital to comprehend the associated hazards, nevertheless. In this post, let’s understand how to mitigate the risks associated with intraday trading.
What is Risk Management in Trading?
In the trading domain, risk management refers to a method or a collection of strategies that help you control trading risks.. If you have robust risk management strategies in place, you can minimise losses when the market goes against your expectations.
Common Intraday Risk Management Strategies
Four popular intraday trading risk management strategies include position size, stop loss, trailing stop loss, and support and resistance levels. Let’s take a closer look at each of them.
Position Sizing
The process of figuring out the appropriate capital or number of units for a trade is known as position sizing. You may successfully reduce risk in a trade by choosing the proper position size. Since intraday trading involves a lot of leverage, selecting the appropriate position size is essential to avoid losses. Professionals advise allocating less than 20% of your total available capital for an intraday trade.
Stop Loss
One of the most popular methods used to limit losses is implementing a stop loss. Setting a limit order at a fixed price lower than your purchase price is a stop-loss. The stop-loss will be performed immediately to minimise losses if the asset reaches the predefined price level. A suitable stop loss would be based on the volatility of the market and the support you are trading.
Trailing Stop Loss
To safeguard your earnings, utilise a trailing stop loss. It is an alternative to a standard stop loss. One places a trailing stop loss order at a price lower than the existing market price. It is expressed as a percentage or a certain amount. The stop loss follows the asset as it moves in the desired direction. If the security abruptly changes its direction, the trailing stop loss will get activated. This allows you to take the accumulated profits and prevent further losses.
Support and Resistance Levels
Accurately determining support and resistance levels in trading is essential to sound risk management. An asset will not rise beyond a resistance level if it is above a support level, and a purchase will not fall below a resistance level. By figuring out these levels, you may precisely set a stop loss or trailing stop loss order. Moreover, you may determine the possible entry and exit positions for your intraday trades using information on support and resistance. If you anticipate that the asset will move back above these levels, you may put a buy order close to support or a sell order close to resistance.
Tips for Risk Management in Intraday Trading
Let’s now take a look at some useful tips for risk management in day trading.
- Always trade highly liquid assets. This will make purchasing and selling easier. Large-cap stocks may also be less volatile because of the enormous volume of trading.
- Before trading, always determine the investment amount, the projected return, and the profit you want to make.
- Using the purchase price of the shares as the stop loss is not advisable. Some people do this to reduce the possibility of losing money.
- Avoid trying to make profits from every stock.
- Avoid establishing performance goals. It causes anxiety and compels you to make errors.
- Invest in a trade based on the probability of profits. Generally, a 1-2% exposure is recommended. You should keep your leverage intact.
- Review previous trades and take note of your errors.
Conclusion
Entering the realm of intraday trading may be thrilling and challenging at the same time. You can move through this dynamic market with the appropriate information and strategies. Picking the right stocks, establishing specific goals, and implementing risk management strategies are essential. Be cautious in diversifying your holdings. Gather complete information about the stocks, especially regarding penny stocks. Create a robust trading plan, practise with a sample account, and, most importantly, keep your emotions in check. Every transaction is an opportunity to learn. So, as you gain experience, your abilities will improve, and your chances of success will rise. Also, always choose a good stock trading app that provides all the trading indicators. Firms like BlinkX offer excellent trading platforms where you can access several day trading indicators and tools. You can optimise your trading by using such user-friendly platforms.
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