What is Risk Management and How to Manage Risk in the Stock Market
1- Before you decide to trade consider to these fundamental principles:
2- Before you trade a stock, know how much you are willing to lose.
3- Check the stock to be sufficiently liquid, can you buy or sell promptly?
4- Determine the cut-loss level before trading.
5- Determine your profit target (take-profit-level).
6- Buy the stock only at an acceptable price level. Use a limit order when you buy a stock.
7- Immediately after the trade has been confirmed, enter the stop-loss-at- market order at your predetermined stop-loss level.
8- Take profit when the trade reaches your profit target.
For example: so many traders determine their cut-loss level 2% of their capital and they call it 2% rule. If you own 1000 shares of X at $100 with a $2 stop loss order in place, your risk is: $2 * 1000 = $2,000. So long as you have capital amounting to at least $100,000 on hand, you would not be considered to be in breach of this "rule".
Portfolio Risk Management
Whit managing the risk of each trade your portfolio risk will be well under control and you manage your portfolio risk actively, but to control your portfolio risk management better notice to this pointes:
1- Determine your overall cut-loss level. Usually your portfolio should not lose more than 10% of your capital.
2- Diversify your investment in at least six or more different stocks.
3- Know your overall risk tolerance before building up the portfolio.
4- Act quickly when you see your risk limits exceeded.
5- Close out the entire portfolio if it loses to your overall stop-loss level.