Risk Management strategies are financial techniques used to minimize potential losses and protect trading capital. Practically, seasoned stock market traders adopt these techniques to keep being profitable and maximise returns while trading. Some of the most popular risk management strategies include hedging, diversification, determining your risk appetite and closely following trends in the stock market to determine when to buy or sell. These techniques can be applied in the African Stock market as well.
Hedging
Hedging is a risk management strategy used to minimize potential losses in an investment by taking an offsetting position in a related asset. It involves taking a position or using financial instruments that will act in opposition to an existing or anticipated risk. Some hedging methods you can use include options. Options allow investors to protect their investment from the risk of big losses that might stem from exposure to the broader stock market. An investor can buy a put option to protect against a decline in the value of a stock or other asset. If the value of the asset declines, the investor can exercise the option and sell the asset at a higher strike price.Additionally, traders can use ES1 futures, which are futures contracts based on the future value of the S&P 500 index, to speculate on future price changes and buy an investment at a specific price and a specific future date. The ES1 futures are electronically traded futures contracts that represent one-fifth of the value of the standard S&P 500 futures contract. They are traded on the Chicago Mercantile Exchange (CME) and provide traders with exposure to the S&P 500 index, which is a widely recognized barometer of the U.S. stock market. Holding these contracts may allow investors or traders to offset losses in their African stock holdings during turbulent times.
Precious metals such as gold can also be used as a hedging strategy for risk management in the stock market. A team of researchers from S P Jain Institute of Management & Research revealed that gold is considered the strongest hedging potential, although nothing is ever guaranteed in trading and investing.
Follow the Trend of the Market
Following trends is another risk management method, which involves identifying the direction of the market and investing accordingly. Considering that Richard Dennis, the CEO of Turtle Traders, made $400 million from following the trends while trading the futures market, the strategy of following trends has paid off for certain traders in the past, helping them predict the direction of a security based on the direction it is currently trending.
Trend traders use both price action and other technical tools to determine the trend direction and when it may be shifting. For example, you buy when the price goes upwards and sell when it goes downwards. In this case, there's no need for forecasting. However, you must keep a keen eye on the market trends and trendlines to know when to trade.
Warren Buffett advised never losing money in the course of trading. However, the stock market is a volatile market filled with uncertainties and risks. By practising risk management strategies, those active in the financial markets can do their best to protect their investments from losses and make profitable returns in the long run.
We give you the best daily information on news, technology, lifestyle, career, health tips, agriculture, business and entertainment. If you can write very well and want to make a living writing online, click HERE!