Risk management in the market

Managing risk is one of the most important things you can do when it comes to investing. In a book called Market Wizards,  Some of the best investors of all time are interviewed and asked questions. When asked what was behind their success, the vast majority answered that managing risk was the most important thing when it came to their success.

Risk risiko aksjemarkedet gains loss batting average

Source: viridianadvisors.com

As you can see from the image above, you need extremely large gains to win back your money if you go on big losses. A 50% loss, therefore, requires that the instrument rises with a 100% gain, in order for you to be back to where you started.  It is very important that you take this into account, and see how extremely important it is to always consider risk versus gain in investments you make.

In many cases, traders tend to have specific risk-reward models that say something about how much they expect in profits, and how much they can risk in losses for a trade to be favorable or not. 

Fundamental investors often do not consider or think about hedging in the market as they "intend to hold the stock for many years". No matter how long you intend to hold a stock, risk, and time exposed to risk in the market, it is extremely important aspects. If you manage to achieve good gains with little time in the market, you have effectively reduced the chance of being exposed to risk. This also means less time in the market which can lead to losses in the instruments you have in your portfolio.

Risk management is something you should think about no matter what strategy you have. Use safety tools such as stop-loss and trailing-stop-loss. Assess market volatility,  and have risk management in mind before you start any investing.

No stock or instrument is so "good" that it is worth following it down with big losses. You should rather take a minimal loss and reconsider whether it is still a good investment after you have gotten out of the position.

Maybe you were in too early? Were the fundamental or technical assessments incorrect?  Regardless, let these assessments come after you have secured your capital, as this is the most important thing you can do as an investor of instruments and securities.​

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