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Risk Management Factors and Strategy in Intraday Trading

risk management in intraday trading

Intraday trading is often much more risky than long term trading or even swing trading. In Intraday trades, you have to take double the precautions and steps to mitigate risks as compared to any other form of trading. While you cannot avoid losses completely, you can still built your trading framework in such a way that any loss does not destroy the foundation of your trading plan.

Risk management in intraday trading is like building an earthquake resistant house while living around volcanic mountains. Earthquakes, just like losses, will be inevitable. But you must live in a house or have a trading strategy which can be rebuilt easily in face of such sudden mishap.

There are many risk management factors which you can include in your trading plan to ensure you do not risk everything in the markets.

Risk Management Factors and Strategy

• Planning your Trades

• Putting Stoploss at Right Points Before Entering the Trade

• Using Trailing Stoploss as Your Profits Go Up

• Diversifying Your Trades Across Sectors and Segments

• Hedging and Buying Downside Put Options or Upside Call Options

• Planning your trades

Even before you enter the markets or set your stop losses and targets, you need to plan your trade on a piece of paper. You have to decide a lot of things like which stock you need to trade in, how much you can afford to invest, how much risk can you take and then comes the step of fixing your entry point and exit points- both stop loss and target.

Never enter a trade without understanding all factors associated with it. Always keep in mind all your limitations, and the market conditions before finally buying or selling a stock in intraday trading. This will help you in minimizing your risk to a great extent.

• Putting stop loss at right points before entering the trade

The importance of placing a stop loss in intraday trading simply cannot be overstated.

Stop loss is the Holy Grail of intraday trading and one of the most important tool of mitigating potential risk and losses. A stop loss is the order which you place in the price direction opposite to your desired price direction so that your losses are restricted.

A stop loss should be placed at the same time as entering the order so that you already know your maximum possible loss, in case of one.

• Using trailing stop loss as your profits go up

While a stop loss is a fixed level at which you exit your position to cut your losses, a trailing stop loss is used when you want to make sure that the profits you earned do not get washed off due to any sudden volatility. A trailing stop loss is when you start earning profit and want to lock in the earned profits if suddenly the markets start moving in the opposite direction.

For example, if you have purchased a stock for Rs. 1000, with a stop loss of Rs. 900 and your target is Rs. 1500. Then, if the stock starts moving towards your target of Rs. 1500, then you can shift the stop loss at Rs. 1000- to protect the amount investment. On further upside, you can shift the stop loss to Rs 1200, to lock in the profit of Rs. 200 per share and similarly you can keep moving the stop loss order till your target is achieved.

• Diversifying your trades across sectors and segments

Diversification of your invested amount across different sectors is extremely crucial. This is important because, at a macroeconomic level, if any sudden news affects the performance of one sector and if all your holdings are in the same sector, then all your invested capital might be lost. Hence, you must invest your money in stocks from different sectors so that any sudden volatility in one does not bring your entire portfolio down. It is like not keeping all your eggs in one basket.

• Hedging and buying downside put options or upside call options

‘Hedging’ is a method of risk management which only the most seasoned of the players understands. An option is an instrument which gives you the right but not the obligation to buy or sell a particular stock. You pay a relatively smaller amount of premium for getting this right and can utilize this right to buy or sell if markets move in that direction. There are two types of options: a put option and a call option. A put option gives the holder a right to sell the security and a call option gives the holder to buy the security, within a fixed time duration. This time duration is called the expiry.

For example, if you have purchased shares of a company whose share prices are going up, but you want to mitigate your risk considering the situation that the share prices fall, then you can buy a put option for the same company, at the strike price below which you expect the prices to fall further. If the prices do not fall, you can hit the target in your cash segment position and you lose your premium paid for the put option. On the other hand, if the prices fall and you start facing loss in the cash, you can use the put option to sell the stock in a falling price and buy it later to recover your losses incurred in the cash segment.

CONCLUSION

All the above steps mentioned above may not be easily understandable and implementable for the amateurs to the intraday trading. Many of these steps such as hedging and trading in options and using trailing stop losses are usually for elite traders who have been in the markets for quite long. However, if you take guidance and assistance of a registered investment advisor, you can get a fairly sound idea regarding these above mentioned methods of risk management. Also, irrespective of your experience in the markets, if you are handling a big sized portfolio, it is extremely important that you utilize these methods of protecting your capital from unnecessary risks.

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