This document discusses the importance of risk management in trading and investing. It outlines the basic principles of risk management, including having a defined trading strategy with entry, stop loss, and profit taking levels. It emphasizes limiting risks on individual trades to 2-5% of capital and maintaining a reward to risk ratio of at least 1:2. The document also provides examples of how risk management differs between beginner, intermediate, and professional traders.

1. Investment Insights
Investment Insights
Risk Management
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2. Disclaimer
•
Trading carries significant risk of losses and may not be suitable for all
investors. Traders should assess these risks either themselves or in
consultation with a financial advisor before investing.
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There is no guarantee that the trading techniques, methods and other
information in this presentation will result in profits. The content in this
presentation in only intended for educational and informational
purposes and not intended as trading recommendation.
•
The content of this presentation is subject to change without notice.
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Stockstream Financial Advisory Services LLP or mystockstream.com
will not take any liability or accountability of losses arising from the use
of information in this presentation in any manner.
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4. Introduction
• There are two risks to any position in your portfolio
• Company Specific: This can be minimized by diversification
and using Stops on positions.
• Market Risk: This can be eliminated by hedging.
• Most basic form of risk management involves having a consistent
trading strategy that is used to determine the following,
• Entry levels: Price where a trade should be entered
• Stop Loss levels: Price to exit a trade if it goes against you.
Generally set at a point where the technical setup used to
justify the trade is no longer valid.
• Profit taking (Limit) levels: Price used to book profits on a trade.
• Technical and fundamental analysis techniques should be used to
determine a trading strategy before entering a trade.
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5. Trading Realities
• It is impossible for a trader to be correct 100% of the time.
• Most traders fail not because of incorrect analysis but because of
poor risk management
• Common mistakes made by non-profitable traders,
• Cutting winning trades early.
• Keeping losing trades.
• Try to exit every trade for a profit.
• More focused on number of winning trades rather than the
amount of profit in each winning trade.
• Entering trades without a defined entry, stop or limit, i.e. no
defined trading strategy.
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6. Risk Management Approach
Type of Trader
Approach
Beginner
• Focused on an entry strategy
• No defined stop loss level. Panic forces exit from
a position.
• No defined limits. Greed sets profit targets
Intermediate
• Still more focused on an entry strategy.
• Sets defined stop loses on trades.
• No defined profit targets.
Professional
• Understands the concept of a lasting trading
strategy.
• Uses proper risk management approach.
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7. Risk Management Basics
• Trading is a business. You should look to be consistently profitable over
the long term instead of risking a lot on individual trades.
• Limit risks on individual trades, ideally to 2%-5% of your trading capital.
• Try to maintain a 1:2 of higher risk to reward ratio on your trades.
• Adapt your strategy to fit the market conditions.
• Have a defined trade plan before you enter a trade. Your trade plan
should give you specific entry prices, stops and limits.
• Have a defined timeframe for your trades, i.e. a time based stop in
addition to a price stop.
• Try to increase the reward on individual trades instead of focusing on
making every trade profitable.
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8. Examples
Type of Trader
Trade Log
Beginner
Number of Trades = 100
Number of Winners = 90; Profit/Winner = $ 5
Number of Losers = 10; Loss/Loser = $ 200
Net Loss = $ 1550 ; Winning Trades = 90 %
Intermediate
Number of Trades = 50
Number of Winners = 15; Profit/Winner = $ 50
Number of Losers = 35; Loss/Loser = $ 30
Net Loss= $ 300 ; Winning Trades = 43 %
Professional
Number of Trades = 25
Number of Winners = 10; Profit/Winner = $ 200
Number of Losers = 15; Loss/Loser = $ 50
Net Profit = $ 1250 ; Winning Trades = 67 %
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