Intraday trading is one of the riskiest , but one of the most profitable forms of trading. It’s the place where folks lose most of their hard earned money.
But unlike them, there are exceptions too, who had made a living day trading, folks like Aziz Andrew and Jesse Livermore had made a living day trading. But what’s the reason behind their success, do they know some kind of secret?
The reason behind their success is “Risk Management.”
What’s Risk Management?
Risk Management is a technique as well as an art that helps a trader limit his/her losses, while making a quick buck.
And since all the best traders in the world use this technique in their trading style, then why should you be left behind?
So here’s some risk management techniques, which you can incorporate in your trading style.
1: Right Broker
Before you even begin trading, you need a broker to execute your trades, so make sure you choose the best trader who provides you with the best trading tools and platform to trade.
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Here are some of the best brokerage firms in India:
A- Zerodha: It’s a Bengaluru based brokerage firm, which provides a well-established trading platform, along with a trading software for its users; it also provides a Q/A educational program, which means you can learn alongside your trading.
And apart from its trading platform and software, it charges a flat fee of ₹20/- or ₹0.03/- per trade whichever is less, and to open a demat account with this brokerage firm you need to pay a sum of ₹200/-.
It’s a great platform, as it provides an educational platform for it’s users, so it can be helpful for beginners.
B- Angel Broking: Angel Broking is a Mumbai based brokerage firm. It has a national-wide presence with connections upto 1000 cities all over India.
It provides Angel Eye as it’s trading platform, which is an easy to use platform and helps a trader to buy and sell stocks.
Apart from its trading platform, it also offers equity trading, commodities trading, and portfolio management type of services.
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It charges nothing to open a demat account, but if you want to day trade, then you’ll need to pay a sum of ₹20/- per trade.
C- IFCI brokerage firm: IFCI is a Delhi based full-service brokerage firm, and has presence in 15 different cities all over India.
As stated above, it’s a full-service brokerage firm with the intention of providing services to both Indian as well as NRIs. It provides quiet diversified services such as—stock brokering, Investment Banking, Mutual Funds, etc.
To open an account with this firm, you need to pay a sum of ₹299/-, with an amount of ₹ 0.02/-, if you’re interested in doing intraday trade.
However, it charges nothing to maintain the account.
2: One-Percent Rule
This rule simply states that, you shouldn’t put more than one-percent of your capital account into a single trade, suppose that you have ₹10,000 as your capital account, then you shouldn’t put more than ₹100 into a single trade.
As capital is the most vital thing in your trading career, this rule helps you in protecting your capital and side by side increasing it.
Stoploss orders are those orders that help a trader limit his/her losses by selling a security for a minimum loss, if the price reaches below the entry level.
For example: you bought a share at ₹100/-, and you put a stoploss at ₹98/- level, then, if the price reached at this level or below it, your stoploss order will execute for a minimum loss of ₹2/- per share.
4: Profit Target
Whenever you enter into a trade, exiting it becomes a necessity, and that’ll tell you about your overall loss or profit in that particular trade.
So, that’s how the profit target comes into play.
Profit targets are those predetermined levels, where you exit your trade for a profit, for example, you enter into a position at ₹100/- and you place a target level of ₹113/- (always remember, that you never place your target orders above strong resistance level, as it hinders your chances of making profits), then if the price reached at that level, your trade will get executed.
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5: Risk: Reward Ratio
It is the most important thing to consider when trading individual stocks, as it helps a trader to manage their capitals and minimize losses.
It tells a trader about how much a trader should risk to make a certain profit, for example a risk to reward ratio of 1:3 determines that a trader should take a risk of ₹ 1 to earn a reward of ₹3.
To calculate the risk to reward ratio simply divide the risk by reward, and if the figure comes out to be less than one then your reward is higher than your risk and vice versa and that’s what we need, we need our rewards to outperform our risks to be profitable in the long run.
To calculate the risk to reward ratio follow the given formula:
Let’s say you bought a share at ₹100 and placed a stop-loss order at ₹98, while a profit target at ₹106, then
Risk-to-Reward ratio: (100-98) /(106-100)
Your reward is higher than your risk, because the figure comes out to be less than 1.
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Risk management is the most important thing while you trade because a day trader capital is most important for your trading career as it helps you save your capital, and keeps you in the trading game for a long-term.
So feel free to use all of the above stated strategies to manage your risks, practice them in a demo account then go for real trading.