How to Minimize Your Risk in Stock Trading

How to minimize your risk in stock trading

There are many stock beginners go broke trading online because they ignore the risk involved in trading. They either listen to guru's advices or friend's tips to trade blindly in the stock market or any other market. These people are mean to fail.

Risk-Reward Ratio

Before you get on any trade or buy any stock, you must evaluate your risk in the trade. If there are more risk than reward, then you shouldn't be buying it. The risk-reward ratio should be 1-3. That means if a stock is currently trading at $10 and it has potential to go up to $13 or go down then to $9, then it is a good one to trade. However, if a stock trading at $10 has potential to go only up to $11 or down to $9, then you should ignore this trade because the risk-reward ratio is only 1 to 1.



Remember, there are over seven thousands stocks that are trading on the NASDAQ, NYSE and AMEX, and you can always find stocks with risk-reward ratio of 1:3, so why would you want to waste money on a 1-1 risk-reward ratio stock.

How to find stocks with good risk-reward ratio?

If you are technical trader, look for support and resistance. If a stock is trading near the support and it is a long distance away from the resistance, then that's a possible stock to watch. However, there are other factors that you should look at other than support and resistance. Make sure the stock is in an uptrend because you don't want to trade against the trade. You want to pick up stocks that temporary pull back and gives you a better opportunity to buy the stock.

Set Stop Loss

After you find the low risk stocks to trade, you should set a stop loss for your stock. Remember, no matter how good the risk-ratio is, there is still a chance that the stock can go against you. Having a stop loss on your stocks reduces your risk. You don't want to wake up one morning and see the stock is bankrupt and all your money is gone.

Diversification

Diversification is another way to minimize trading risk. That means you don't invest all your money on one stock. You will invest them on different stocks preferably across different sectors and industry. That way when a certain industry is not doing well, you won't be heavily affected. As a good rule of thumb, you not invest more than 10% of your portfolio on any stock and should not invest more than 30% in any particular industry.

I'm a full time trader and founder of Stock Screener. You can learn more about stock trading and use the screener to scan for Candlestick Patterns.

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