Why risk control is important in trading?

 “Throughout my financial career, I have continually witnessed examples of other people that I have known being ruined by a failure to respect risk. If you don’t take a hard look at risk, it will take you.” – Larry Hite

As with any business activity, risks are involved in trading as well. And if you take arbitrary risk, your current trade could be your very last one! This is because a single trade gone wrong can wipe off your entire trading account. But, you can’t really trade without risk.

Then, what should you do? You must learn to manage your risk using risk controls. Risk controls are often underestimated. However, a trader who consistently uses them can manage losses and open herself to more opportunities for successful trades.

Risk Control in trading

Risk control in trading refers to a plan-based trading strategy that focuses on identifying, evaluating, and preparing for any potential for loss. Risk represents the probability of loss when the market/ asset price moves in a direction opposite to our expectations.

For risk control in trading, one needs to keep in mind several aspects such as which financial instruments to trade in, time of entry and exit, where to set profit and loss limits, how to identify good opportunities, how to deal with markets moving against our position, how to keep emotions at bay and finally, how to stay on course with a plan.

Here are some ways to execute risk controls and their importance:

1. Plan your trade

It is common knowledge that planning can even win wars. The same concept applies to trading as well. Successful traders plan their trade before they trade.

Have a logical strategy with the stop-loss and take-profit limits chalked out. If you do not plan your trades, it is very likely that emotions will rule your trades and lead to losses.

READ :   How to automate your trading strategy using PHI 1?

2. Follow the one-percent rule

The one-percent rule is essentially a rule of thumb that says that you should never place over 1% of your trading capital or account in a single trade.

Thus, if you have Rs.1 lakh in your trading account, your position in any single trade should be less than Rs.10,000. This is an effective risk control strategy. However, many traders put as much as 2% too or even lower than 1%.

3. Set stop loss and take profit

As highlighted above, setting stop-loss and take-profit is an important part of your trading plan. Although it is mostly done via technical analysis, fundamental analysis also helps with timing.

One widely used indicator to set stop loss and take profit points is moving averages, given that they involve simple calculations and are also widely tracked by the market.

It makes sense to use longer-term moving averages for highly volatile stocks and also use fundamental events such as earnings, news announcements, etc. to account for the timing aspect.

Make sure you calculate your expected return. You may use the following formula: [(Probability of Gain) x (Take Profit % Gain)] + [(Probability of Loss) x (Stop-Loss % Loss)]

4. Diversify your trades

Ensure that you do not put all your eggs in the same basket. It means do not put all your capital in one trade or instrument.

Ensure you have a healthy mix of instruments to reduce your concentration risk to a particular asset class, sector, and even geography. Choosing less-correlated instruments is recommended while trading.

READ :   Top 5 Best Algo Trading Software in India 2021

5. Consider hedging

Hedging is a strong risk management tool. It essentially involves taking the opposite position from your original position.

Here, if your primary position loses, the other position will still profit and make up for the loss.

What if your algorithmic trading platform itself comes with risk controls? It’s true!

PHI 1 comes with various types of Inbuilt Risk Controls that sets the trader free from the constant worry of losses. Unlike other algo trading platforms, PHI 1 not only offers standard risk control but also calendar-based risk controls.

Further, traders can create custom risk controls during strategy creation. Within calendar controls, traders can make use of day control, time control, week control, month control, and date control, which offers them the option of fine-tuning their trading strategy.

Risk Control - PHI 1
Risk Control – PHI 1

Along with superior risk control, PHI 1 offers an all-in-one trading solution so you can use your precious time exploring unique trading opportunities!

Try PHI 1 for free today! Tagged : / / / / / / /

5 Benefits of Algo Trading for Stock Traders

Algo trading or Algorithmic trading is an automated program that uses a set of defined instructions to execute a trade. Simply put, algorithmic trading is a set of directions for placing a trade.

Computerized algorithms process data faster, cheaper, and more accurately than humans. Algorithmic trading helps make robust trading decisions by efficiently processing data―precisely why it is becoming increasingly popular in India.

There are numerous advantages of algorithmic trading over manual trading. For instance, it saves the time needed for supervision and execution in manual trading. Algorithmic trading also helps traders benefit in measures of speed and accuracy.

Let us look at each of the advantages of algo trading in detail.

1.   It is incredibly fast

In algorithmic trading, algorithms are written beforehand so the instructions are executed automatically. The speed is so fast that it’d be nearly impossible for a human eye to spot it.

Multiple indicators can be scanned and executed in a jiffy! Thus, trades get analyzed and executed faster. Automated programs generate orders with profit targets and protective loss stops, all at once. This implies that traders and investors can swiftly book profits off small changes in price.

2. It allows you to place accurate trades

Unmatched accuracy is a key advantage offered by algorithmic trading. Manual trading has lots of space for committing errors in many aspects. However, with algo trading, the probability of mistakes is reduced drastically.

Accuracy is the decisive factor between a good trade and a bad one. In a computer algorithm, the trades get double-checked and any chances of error are eliminated, preventing things from going downhill and enhancing your probability of profiting from trades.

READ :   Top 5 Best Algo Trading Software in India 2021

3. It minimizes emotions to reduce risks to your trades

As is well-known, human emotions play an important role while trading. The human mind is vulnerable to getting carried away by emotions while making a trade, thus affecting the ability to make decisions based on logic.

Emotions like fear, hesitation, greed, indecision, and others can hinder one’s potential stick to one’s trading plans. However, algo trading takes out the emotion from trading. With automated trading, it is impossible to trade impulsively. Thus, algo trading makes trade more decisive for traders and implements orders without ‘second thoughts’.

4. It allows you to identify and prevent bad trades

It is manually impossible for a trader to know which strategy will work in a given situation. Backtesting allows traders to assess the viability of a trading strategy by showing how it would have worked on a set of historical data. If the backtesting works, traders may develop the confidence to deploy the same strategy in the future.

Thus, backtesting reduces the number of loss-making strategies, making way for the most productive strategies to be implemented.

5. It saves time and is cost-effective

Last but not least, algo trading is a cost-effective way to trade. Manual trading involves spending a lot of time behind the screen and investing a lot of energy constantly to identify trading opportunities. Continuous supervision is tiresome and causes the trader to miss out on opportunities.

Algo trading reduces this time investment and works just fine without hectic supervision. By being relieved of the mundane chores like data integration, traders can focus on exploring opportunities in the market and how to exploit them to their advantage.

Further to cutting down costs in terms of the time invested, algorithmic trading is particularly useful for large order sizes in terms of cost saving.

In addition to these benefits, trade rules get established in algo trading and are performed automatically; hence, one’s discipline stays intact even in volatile markets.

Algo trading solidifies discipline because the pre-defined instructions will be followed as they are. Moreover, algorithmic trading systems allow trading with multiple accounts or implementing various strategies simultaneously across a wide range of markets within seconds, thus diversifying your trades.

Algo trading makes trading convenient and unlocks your true potential as a trader. Algorithmic trading can be a great blessing if done using the right platform.

This is where PHI 1 comes in.

With its easy-to-use intuitive interface and advanced features, PHI 1 provides an end-to-end solution for traders, helping them focus on trading, rather than on daily, mundane tasks associated with it.

Get the benefits of speed, accuracy, and reduced costs with PHI 1’s advanced screening, superior backtesting, advanced risk controls, multi-symbol strategy creator, and multi-broker integration.

No download, no installation, and no data integration required, saving your time! A lifetime free plan to paid plans with even more features, saving your money!

Get the best of algo trading and the ultimate freedom to unleash your trading superpowers with PHI 1.

PHI 1 – Setting you free

Tagged : / / / /