Risk management is the discipline of identifying, monitoring and limiting risks.
The main difference between an amateur and an experienced trader is that the latter always tries to understand and control portfolio risks. Before entering into any trade, good traders first think about how much risk to take and how much risk exposure comes with a particular trade selection. Only then do they allow themselves to think about how much profit they stand to make. Smart investors always cut down their position and exposure if they determine that a portfolio carries too much risk. They calculate this all-important estimation by employing Risk Management defined as that set of methods and procedures taken to estimate, and control risk for the purpose of achieving optimal investment results.
The main difference between an amateur and an experienced trader is that the latter always tries to understand and control portfolio risks. Before entering into any trade, good traders first think about how much risk to take and how much risk exposure comes with a particular trade selection. Only then do they allow themselves to think about how much profit they stand to make. Smart investors always cut down their position and exposure if they determine that a portfolio carries too much risk. They calculate this all-important estimation by employing Risk Management defined as that set of methods and procedures taken to estimate, and control risk for the purpose of achieving optimal investment results.
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How to manage portfolio risk?
1. Know your overall risk tolerance before building up the portfolio.
2. Determine your overall loss level. Usually your portfolio should not lose more than 10% of your capital.
3. Diversify your investment in at least three or more different stocks.
4. Actively manage the risk of every individual trade.
5. Know your overall risk and where the risk comes from.
6. Act quickly when you see your risk limits exceeded.
7. Close out the entire portfolio if it loses to your overall stop-loss level.
