Basic terms for Risk Management

For us and for terms of are trading, we want to simplify this term and everything related to the minimum. This article is primarily about specifying the bacis terms, therefore we recommend, for people interested in this problematic, studying from other sources.

The aim of Risk Management is profit. It is quite simple to reach profits on the Stock Exchange. It is technically, technologically and legislatively the simplest business, which you could imagine. Furthermore, it is possible to do it legally and fiscaly very effectively (within Czech republic conditions, the resulting tax is 0-15%). It is the only probabilistic business in the world, where we can work only with 2 possibilities on long-term basis. It is a probability of 50/50 or 1:2. Yet, millions of investors do this business in incredibly complicated way. The result is that 10% of professionals take money from 90% of amateurs. The winner takes it all. Who lost, pays. It is a fair and uncompromising business. It is necessary to know its potential, possibilities and pitfalls. Other informational resources deal with this issue.

Risk Management WinSignals - set of instructions and information for successful realization of trading in practise.

Management of trading position

Management of trading position. Quite little used term but essential for us. 90% of speculators believe that once opened their trade on Stock Exchange, they continue to be only victims of further development. Their "professional" activity is to set a Stoploss as an account"s protection from capital loss (advice from broker and literature) and passive waiting for profit. They enter their positions due to doubtful outcomes of fundamental news (these are ofter wrong) or simple or more diffucult technical analysis. Add emotions in decision-making, fear and greed and it is quite obvious, that further managing of trading positions opened like this, is quite unrealistic. Rather, it is more like a "russion roulette".

Managing the trading position. In trading, there are only 2 options (in words: two). Position opened in the Stock Exchange can only go to profit or loss. The fact is, that you can have more tham 90% of all positions closed in profit. Similarly, you can ruin the same positons in the real time and close them in loss. Stock Exchange acts cyclically and sentiment changes as the wind direction. We predict the wind direction, the part of SAO is also trend analysis. If the market forces don"t work in our favor, the short-term or middle-term sentiment later does. We study different levels of sentiment and market connections (correlations between assets) and therefore we can sometimes "sit out" our profit. On the other side, if the possition is in profit, then it is necessary to secure it or even withdraw it right away.

Within the sentiment, we identify predominant market forces, sentiment, and we focus on reached profit. If the profit level of Win Profit Target L1 is reached, we consider the signal as successful and do not deal with it anymore. If the price development turn into loss levels later, we can only laugh to those, who suffered from loss. Someone has to hand over the money. But it is not us and our smart clients!

If the possition is developing into profit, it is the right time for maximalization of profits. With a Stoploss order, you can secure reasonable minimal profit and move your profitable limit to a higher level. So, you manage your profits and have your money under control. You can leave market only with small or bigger profit. What a pleasant situation :-)

If the possition is developing into loss, you have to act cautiously. If you do not have an ability to have your risk under control, then the physicall Stoploss is a solution. However, it is a probabilistic trading. Setting the Stoploss is always programming of loss with bigger or smaller probability. Amateur speculators are encouraged to this process (it is the broker"s interest...). Professional take decisions into their own hands and make decissions according to current market development. The best solution is probably the SAO with 90% success rate.

Within the loss situation (even behind the set MSL) it is necessary to keep in mind, that up to 80% of these losses are temporary. What are your possibilities? Three already mentioned. Take a loss according to your consideration and risk perception (professional solution). If there is a market possibility, wait for your profit, it will come later (professional solution, and a smart one...). On other price barrier, due to SAO principles for WinSIgnals, simply buy more in the same direction, compensatory tactics (professional and ofter very profitable). On the other hand, it is necessary to fairly estimate those 20% of losses, where is a minimal chance for profit or its compensation and run out of markets in time. That is a privilege of professionals.

Other terms

Risk Distance. Price distance from your opened position converted to pips, points, cents and in the result to real money in EUR or USD. Your Risk Distance should depend on your possibilities to have an acceptable loss under control. Technically, it is a distance on chart, when the situation in loss can develop due to technical levels of previous price development (trend analysis, price barriers, technical market potential in pips, points, cents...). Then, within the RD, we consider the use of mental or physical Stoploss.

Duty of investor = to have a loss situation and risks under control. Set adequate levels of Risk distance on charts according to the possibilities of Your account and market situation.

Profit Distance. The same towards profits. If we define profit limits L1 to L3, the potential is often significantly higher... Expected favorable development into profit levels. Duty of investor = monitor and secure any profit, monitor profit development.

Financial leverage. If you trade with different financial assets, it might require a deposit for trading from you. The deposit is refundable (Margin). Financial leverage can be understood as a proportion of used deposit"s height (Margin) to the size, financial capacity of the asset. For little money, you can control financial contracts of significantly bigger size on the Stock Exchange. This created financial leverage. Your profits and losses depend on the real contract value. Financial leverage is bogeyman in the hands of amateurs and manufacturing tool in the hands of professionals. Alone, It does not have to be important. We consider "financial efficiency" as more important term for risk evaluation.

Financial effeciency in trading is a result of multiplying the number of points, cents or pips with a real earning (loss) of asset on the given point, cent or pips. On each point, cent or pips we earn a specific amount in USD or EUR. Financial effeciency in the Goldstar conditions is tens to hundreds EUR(USD) on one contract, Lot. Financial efficiency of trading with classical commodity futures contracts is much more larger, while the financial leverage is up to 10 times smaller. These are the paradoxes of Stock Exchange mathematics, learn to understand them...

Risk in trading can be understood as a situation, where the trading position suffers from any loss. The risk can be understood as a relative % of Stock Exchange capital capacity or as a financial risk (possibility of capital loss). Risk turns into capital loss only, when the trading position is closed in relevant loss situation. Up to 80% of these situations can be closed in profit after all... How to deal with this problem? What is and what is no a reasonable risk?

The only effective possibility means in general to work on Stock Exchange technically with the lowest risk, if possible. To have a sufficient available capital on your account. Reasonable risks can be teoretically a temporary loss on one trade of approximately 1-2% of account"s capacity. When trading with small accounts, you always bear more significant risks!

Risk under control. If I trade on Stock Exchange with a low capital on each individual trade, I risk a small part of capital, then a loss positions do not have to bother me too much. With reasonable loss, there is no need to be in a bad mood, it is still possible to sleep well. The opposite is the situation, when I lose tens of percent at one time. These are stories for amateurs and stupid speculators. We won"t let that happen.

What is overtrading? Many investors work on Stock Exchange with relatively small capital. Others work with larger capital, but burden it disproportionately with a number of realized trades. Many dogs, rabitt"s death. Many contracts, lots, traders death, or at least threat. And risks beyond control. Rich people don"t make big bets. They have their emotions, acting and money under control. Overtrading is a situation, when emotions, decision-making processes, acting and money are beyond our reasonable control. Till emotionaly and by result unmanaged process. Even with a good market prediction, you can financially hurt yourself, if you want unreasonably much and quickly... If you go for an adrenalin ride with a view of high profit from time to time, it will work out a few times. When it does not work out, then the profitable series of trades can be already without you. Don"t let that happen.

Effectively manage finances on the Stock Exchange is possible only with adequately large accounts and with disciplined approach to trading. The principle is to open as little conctract, lots as possible within the first trade. This enables you to have risks under control. It also enables to profitably buy the position in addition, if there is appropriate situation. If we get a lot into trading from the beginning, we can not buy anything in addition... We can only wait, how it ends. Smart professional works with account, that enables him to buy several times in addition with limited risk.

Trading planning. By practising, you find out that it is possible to close about 90% of trades in profit in the real time. Plan and withdraw this profit, when there is appropriate situation (preferably by automatical Limit order). Plan your approach to trading and using, write it down and especially follow it. Be consistent, patient and honest. Don"t let yourself to be demotivated by a serie of worse trades. Also don"t get too euphoric after a serie of trades (more frequent case). Don"t increase risks and number of lots in trading just because you are currently doing really well in trading. It does not have to pay off. We play fair with you and that is why we tell you that. On the other hand, perceive the results, potential and possibilities of your approach to Stock Exchange in line with your possibilities and experience.

And finally, one comment to the problematics of Stoplosses. Stoploss order on the Stock Exchange is order, when you want leave your position without any fear of unfavorable price development. On Forex and CFDs Stock Exchange, this order works automatically. At shares and commodities, as well as at options, it is more difficult. In certain market situations, the Stopploss can be ignored or moved unfavorably (slided), it is good to understand these things. Setting the Stoplosses as account protection against the losses is an alternative of safe Risk Management. On the other hand, it is a little know fact, that individual traders loses constantly up to 40% on improperly specified Stoplosses. Who benefits from that? Mainly brokers, you will stay in game and give them money for provisions and spreads. On the other hand, traders with small accounts (massively encouraged by brokerage complanies) have no other option. Even relatively small, even temporary losses could significantly damage their accounts. The advice? Learn how to manage risks and decide about closing of trading positions independently. And another advice: it is not possible to earn money with a small capital. Rather than small account, use the money in any other way.

MSL, mental Stoploss, is a market level, where it is obvious, that originaly identified level within the probabilistic situation simply develops unfavorably in my disadvantage. It is a price level, on which I have to change the original intentions, when I am able to leave with adequate or minimal loss or situation. It can also be situation, when I have a chance for profit, within different time possibilities with regard to individual risk tolerance. We emphasise the word "individual"! Therefore, we have to leave the actual using of physical or mental stop losses on you. We believe that we told you fundamental information to this issue for your decision making.

If you are long-term profitable on the Stock Exchange, it will be a result of your smart approach to the problematics of Risk Management. If you are exxesively unprofitable, it is a problem in your head, not problem of Stock Exchange actions. Your individual Risk management is the same issue as driving a car. You can drive comfortably and safely, easily to your destination and on time. You can also drive as fools, hazard, risk and destroy you car (account). You have to set your settings, perception and abilities to have your own risks under control according to the Highway Code considering the safety and possibilities of your car, considering your abilities to have your own risks under control, considering weather, other participants, actual emotions, mood and health.

Desire to get to your destination, especially safely, i.e. analogically on the Stock Exchange to earn money without any stress and financial injuries. That is intelligent and smart Risk Management. This is not an issue of different instructions and approaches, it is an issue of ability to think and use your own head. If someone has a trouble with that, he should stay away from Stock Exchange speculations. Similarly as driving car... By the way, do you know why there are hundreds thousands of accidents and thousand of dead people on our roads? It has probably nothing to do with a quality of cars, with instructions fot their use or with the Highway Code. Isn"t it a fact, that there is excessive amount of fools and individuals risking... Safe operation, conditions for Stock Exchange speculations and risks under control, those you have to secure for yourselves. Thank you for your understanding and we wish you a successful Risk Management!